Tax Tips For Writers: Bad Debts And Income Averaging

Question: Last year, a magazine agreed to pay $2,000 for an article, plus reimburse my expenses. Usually, I ask and receive more for this kind of article, but I wanted the exposure this publication could provide. This year, I made sure to deliver the article well in advance of its due date, along with my bill for $2,700, comprised of the $2,000 fee and $700 for travel, telephone and other expenses incurred in the course of research. The assignment turned out to be a fiasco. I will collect zilch, because the magazine went kaput; last I heard of its publishers, they had gone into the witness protection program.


When tax time rolls around, I know where the various out-of-pocket expenses aggregating $700 go on which lines of Form 1040’s Schedule C (Profit or Loss From Business). It seems only fair that I should be entitled to a further reduction in my income taxes with a bad-debt deduction on Schedule C for that unpaid $2,000 fee. As I fall into a 30 percent federal and state bracket, the additional write-off works out to a savings of $600 — not monumental moola, but likely enough to cover several sumptuous spreads of my favorite paella at a Zagat-recommended restaurant. Some extra consolation is that a decrease in Schedule C’s net profit will lower what I owe for self-employment taxes. But where do I enter the $2,000 deduction in the expenses part of Schedule C? Or am I supposed to amend the previous year’s return in order to claim it?

Downsize your dining desires and be content to gorge with the other gringos at La Casa Internacional de Pancakes. You cannot take any deduction for the $2,000. The snag: You are what is known as a “cash-basis taxpayer.” That is the Internal Revenue Service’s designation of individuals (including most of us) who generally do not have to report payments for articles, books and other income items until the year that they actually receive them and do not get to deduct their expenses until the year that they pay them. As the tax code does not require you to count the $2,000 as reportable income, it does not allow you to deduct an equivalent amount. Only if you were an “accrual basis taxpayer,” and had previously counted the $2,000 as reportable income at the time it became due to you, could you deduct it now, as it has not actually arrived and is a lost cause.
Question: For the past few years, my writing income has been meager. But this year’s income will soar because of a six-figure book advance. According to a fellow writer, income averaging will lower my tax tab by many thousands of dollars. When I file next spring, do I need to complete some form for averaging that has to accompany the 1040 form? 

: Your friend’s advice might have been helpful when the Oval Office was occupied by Ronald Reagan. But the rules now on the books provide no break for someone whose income jumps. A top-to-bottom overhaul of the Internal Revenue Code, known officially as the Tax Reform Act of 1986, included a provision that abolished averaging for nearly everybody, though there continues to be a limited exception for farmers. My advice is to focus instead on easy and perfectly legal ways for writers to trim taxes. A standard tactic is to stash some of that advance money into one of those retirement plans for self-employed persons.
Julian Block, an attorney in Larchmont, N.Y., has been cited as “a leading tax professional” (New York Times), "an accomplished writer on taxes" (Wall Street Journal) and "an authority on tax planning" (Financial Planning Magazine). He speaks at writers’ conferences. His books include "Tax Tips For Writers: Savvy Ways To Trim Taxes To The Legal Minimum," praised by law professor James Edward Maule of Villanova University as "An easy-to-read and well-organized explanation of the tax rules. Writers, photographers and artists would be well advised to buy this book.” Information about his books is at  Copyright 2010 Julian Block. All rights reserved.