Even if you're struggling to make a living with your writing, the government wants its cut of your revenue. That's why keeping good records is so important. You can offset at least some of your income tax liability by claiming deductible expenses related to your writing. But there are some rules you need to be aware of as you prepare your tax return.

The “Hobby Rule”

If you show losses from your writing endeavors — that is, your expenses are more than your income — in three out of five years, the IRS may determine that your writing is a hobby rather than a business. The difference is important for tax reasons. Hobby expenses can be deducted only as long as they don't exceed the income from the hobby; any expenses above the income don't count. If your writing is classified as a business, however, you can carry over the extra expenses into future years (or even prior years if you want to file an amended return).

The hobby rule has been challenged successfully in court, so it may not be as big an issue for writers in the future. However, most tax professionals recommend that writers try to show at least a small profit in three years out of every five, just to be safe.

Do I have to delay deductions until I get income from my writing?

No. Since 1988, writers and other artists have been exempt from the general rule that requires most businesses to match their expenses and income. The law recognizes that you might spend several years working — and incurring expenses — on a project before you earn any income from it. However, the “hobby rule” may come into play here.

Deductible Expenses

The expenses listed above can be deducted on your income tax return, as least up to the amount you earned from your writing. If you earned $3,000 from a book sale, you can claim writing-related deductions up to $3,000. If your expenses for that year were $4,000, you can only claim $3,000; however, you might be able to carry the extra $1,000 forward and deduct it the next year.

Although you should request and keep receipts whenever possible, the IRS may allow small expenses — under $75 — without receipts. Things like taxi fare, lunch at a hot dog stand, and other expenses might fall into this category. You should keep a diary or log to record those nonreceipted expenses, including such information as the date, the purpose of the expense, who was with you, where you were, and how much the expense was. The IRS generally allows such properly recorded expenses for travel, meals, and entertainment.

Keep in mind that you don't report income until you actually receive it. If you sign a book contract in December 2004, for example, you probably won't receive the advance check until January 2005. In that case, you wouldn't report any income from the book contract on your 2004 tax return.

What if you sell a project but never receive payment from the publisher? This sometimes happens when magazines go out of business, and there's a popular misconception among writers that they can write off the monies they are owed but have not been paid. This isn't true. As far as the IRS is concerned, that payment is just income you haven't received yet; it doesn't count as income until you get it, so there's no loss for you to claim if you don't receive it.

Home Office

IRS guidelines on home offices are fairly strict. Your home office has to be a separate part of your residence — a separate room or part of a room, or even a separate building — and used “regularly and exclusively” for your business. Your home office doesn't have to have doors, or even permanent partitions, but it does have to be off-limits for other activities. You can't use your office to watch television with the kids, and you can't call the dining room your office if you use it for dining. Whatever the set-up for your home office, it qualifies for tax purposes only if the area is used exclusively for your writing.

If you can claim a home office deduction, the dollar value is based on the ratio of your office space to your entire residence. If your office is 120 square feet and your home is 1,200 square feet, your home office represents 10 percent of your home. Therefore, you can claim 10 percent of all household expenses — utilities, rent or mortgage, property taxes, insurance, maintenance, even tips for the newspaper mail carrier — as a deduction.

You can only claim the home office deduction in years when your income from writing is greater than your expenses. If your expenses are higher than your income, you may be able to carry the home-office deduction forward into a year when you earn more money from your writing.

The business side of writing can be confusing, and many writers have a hard time motivating themselves to keep good records and do the research to take care of the financial side. But it's well worth your efforts, both in terms of averting headaches in the future and in terms of preparing for the day when most of your income comes from your writing.