There's a first time for everything. Since I put in sufficient money into forwarding my fledgling writing career in 2010, I can actually deduct business losses. This is a good deal for the starting aspiring writer. (But also keep in mind that once you start making money, the IRS will get their payback through self-employment taxes.)
And since I'm an actuary, I chose to do my taxes on my own (as I do every year). I had to learn how to fill out these new forms: Schedule C (Profit or Loss From Business) and Form 4562 (Depreciation and Amortization). It took me several hours this week to figure it all out. Perhaps some of the knowledge I've gained can help you fill out your own Schedule C/Form 4562 more quickly.
This article gives the best advice I could find on the web. It contains general tax advice geared directly to freelance writers.
Okay, let's look at Schedule C. I put my name and SSN at the top. I enter:
A) Freelance Writer (you can put whatever title you want here - just make sure it sounds business-y)
B) 711510 (the code for artists/writers)
C) blank - I am my own business.
F) Accounting method = Cash. This means that I will account for all income in the year that I receive it (instead of stretching it out over several years). For expenses, I'll do the same, with some exceptions noted below. "Accrual" is meant more for people that buy and sell a whole bunch of stuff. Most writers will use "Cash" accounting.
G) Yes, I materially participated in my business.
H) I just began my business (started getting serious/going to conventions/etc.), so I check this box.
Part I) Income - I didn't receive a dime for writing in 2010, so this section is one big fat zero. (Warning, if you go five years without reporting a profit in at least three of those years, the IRS may come after you and try to make you pay back these taxes. Hey, if I don't start selling to magazines/etc. by then, they can have their taxes back!)
Part II) Expenses - Okay, everything above this section was easy. To fill out this next part, you just need to know what all your expenditures were, and what category you want to put them in. (There seems to be a little variation as to where different people put things, but it all adds up to line 28 in the end. Just be consistent where you put things year to year.)
This is where I put stuff:
#8) Business Cards.
#9) Mileage for using car (I only put in mileage to the conference I attended. It wasn't worth it to include the 1 mile trips to the post office - but if you keep track of that kind of stuff, this is where it goes.) This year, the mileage rate is $0.50 per mile.
#13) Depreciation - see instructions for Form 4562 below.
#18) Postage and paper supplies.
#22) Other supplies (like the cool moleskine my wife bought me).
#27) See Part V below for a list of "Other Expenses".
A note about line 30: Most of what I found on the web seems to indicate that writers don't take the time to calculate the business use of your home. It's a lot of work for very little return. I just put zero like all these other folks.
#32) A confusing line. Most of us will check 32a (all investment at-risk), which is what you're supposed to check unless you happened to invest your money in certain not-at-risk investments (listed in the IRS instructions). Chances are, none of us will ever do that in our writing business.
Part III) Skip.
Part IV) Since I claim mileage expenses in line 9, I answer all the questions in this part. I estimate my total 2010 mileage on my car. I write down the conference round-trip mileage, estimate commuting to my day-job (52*5*round trip mileage) and subtract to get "Other". About the commuting miles, I considered writing "0", as I don't commute to my writer's business. But since the IRS instructions say, "commuting is travel between your home and a work location," I take that to include my day job. In either case, it doesn't affect the deduction. Only the business mileage is deductible.
I answer questions 45-47b all "Yes".
Part V) There are certain expenses that don't go into the Part II categories. Here I list:
Subscriptions to Trade Magazines
I could also add books that I've bought for "research", but I have to admit that I bought those three books for fun.
Note that since there is no Income for me, I end up with a negative number in line 31. I have a business loss, which directly reduces my AGI on 1040. That's good, as it means less tax liability and a bigger refund (or lower payment).
Okay, now let's look at Form 4562, which you need to fill out line #13 above.
Now, this is the hard form. This is the scariest thing I've ever seen in my life. This is what makes even the smartest actuaries cower like little babies before going down to H&R Block. What's pretty sad is that the math behind the form is pretty basic stuff. It's just knowing where to put the stuff that's so hard to figure out! I still don't know where everything goes, and I know just enough to help out with my specific situation.
There are certain expenses where you are forced to use the "Accrual" accounting instead of "Cash." That is, if a certain asset you buy has a useful life over several years, then you need to stretch that expense over the useful life. This includes computers, software, cars (if you buy a car specifically for business transportation), houses, offices, etc. In my case, I have two types of expenses I can claim:
#1) A computer which is used 10% of the time for the writing business.
#2) Computer software bought this year used 100% for the writing business.
Let's see how I fill out this form.
Part I) Section 179. This is a special exception that allows you to claim the full amount of the expense during this year. If you skip down to line 11 and 12, you'll see that no business income means you can't claim Section 179. That describes me, so I leave this section blank.
Also, the website I mention above advises against using Section 179, as you're probably better off deferring the deduction to later years when you start making a bigger profit. In other words, if you claim 179 now when you're not making as much, you may end up paying more self-employment taxes later when you have bigger profits.
Part II) The IRS instructions say that computer software (not claimed under Section 179) goes into line #16 using 3-year straight line depreciation. This means you simply take how much you paid for software this year and divide by three. You also claim this the next year and the next. If I were to buy more software in 2011, then I would keep track of everything in a spreadsheet.
Part III) I don't have anything that falls under MACRS Depreciation. (Run for the hills!)
Part IV) This adds everything up, including Part V which we've haven't gotten to yet. Really, IRS, have you ever heard of linear processing? I hope you guys never write a sci-fi novel!
Part V) The IRS instructions define what's included in "Listed Property". This includes the computer I mentioned above. Note that I could have claimed Section 179 on the computer and the software, if I had a profit and if I chose to do so. Since I didn't use Section 179, the computer has to go here in Part V.
Since I only use that computer 10% for writing, I must put it in line #27. Here's what I put in each column:
b) Date when I started using it for writing
c) 10% business use
d) the full price of the computer
e) 0.10 * the full price of the computer (yes, I only get to deduct a tenth of the price - bummer! I could tell the kids, "Sorry, no more computer for you. You didn't eat your broccoli." Hmmm....)
f) recovery period = 5 years (always use this for computers)
g) S/L for straight line depreciation
h) divide (e) by (f).
I get to include this over the next four years as well. Note that I can change the % for business in later years (especially if the kids don't eat their broccoli).
I left Section B blank, as that info is contained on Schedule C and I only have the one car I use for writing business.
Part VI) I left this blank. This appears to be for something else - one of those sections where you'll know if you have to fill it out. The examples I've seen have all left that section blank.
Okay, there you have it. If you've gotten this far, then I'm a better writer than I thought. Who else could captivate an audience who hopefully never has to fill out any of these forms?
And if you have to fill one of these out yourself, happy tax filing!