Indie Publishing: The Business of Indie Publishing (5 of 5)

 

This is the fifth of five posts in which I delve into detail on the presentations and discussion at the Indie Book Event 2011.  Here's a snapshot of all the blog posts related to the Indie Book Event:

 

 

My overview post: "Indie Publishing:  One Size Does Not Fit All"
Post 1: "Pros, Cons & Definition of Indie Publishing"
Post 2: "Editing and Indie Publishing"
Post 3: "Marketing in Indie Publishing (Part 1)"
Post 4: "Marketing in Indie Publishing (Part 2)"
Post 5: "The Business of Indie Publishing" {you are here}

We've covered a lot of territory in this series and this final post will wrap things up for us.  This post will discuss some key points from Pavarti Tyler's presentation about setting up and running your publishing business.

Pavarti is an accountant and indie publisher.  She is uniquely qualified to give us some perspective on important tax laws and accounting practices.  Most of this information will apply only to U.S. residents, although some of the principals may apply in other countries as well, depending on the tax laws.

If this sounds like a major snooze-fest, I'll let you in on a secret:  it is a bit dry, but so critical to understand if you're going to be an indie publisher.  I'll keep it as short as possible:

The first critical thing to understand when you set up a publishing business is IRC183, known as the "Hobby Loss Rule."    This law says that a business can't take a loss for more than 2 years out of 5.  If you take a loss for your first two years, then the worst you can do is break even after that, in other words, you are limited as to the deductions you take after the first two years of showing a loss.
You need to determine whether you are in business to make money or are you in business because it's fun.  If it's just for fun, you can't declare a loss, you can't file bankruptcy, etc.  If you are in it to make a profit, then you need to follow proper bookkeeping procedures, prepare financial reports, file tax forms, etc.
80% of small businesses will be audited.
In order to officially set up your business, you'll need to file the proper forms with your state to form an LLC and get an EIN number (like a social security number, but for businesses).
Once you set up your business, your business expenses are deductible.
Capital investment is necessary in your business and needs to be reflected in your business records.
You would set up a publishing business as an LLC (limited liability corporation) which separates you from a business.  A corporation, on the other hand, pays business taxes but an indie publisher doesn't need to do that.
If your revenue is more than $50,000 (or if you are mathematically-challenged), then consider hiring a tax accountant.
Whenever your business makes money, the profit is taxable income.  It needs to be declared.
15.7% is the self employment tax which is owed on all the profit.  But depending on the structure, that money can be paid into Medicare / Social Security.
Keep that 15.7% aside rather than reinvesting it into your next book or marketing, etc.
Research best practices for bookkeeping or hire an advisor who can help you.
You may need to obtain a business license – this will depend on your state or local requirements.
If you are not indie publishing, your publisher will issue you 1099's for what they've paid you and you simply report these amounts on your annual taxes.

Pavarti was also kind enough to share with me some more in-depth information on the Hobby Loss Rule, as follows:

You can read the details of the Internal Revenue Code.

Various code sections may come into play whenever there is an adjustment that may involve IRC §183, including but not limited to the following:

§ 183 – Provides, generally, that if an activity is not engaged in for profit, deductions are allowable in the following order and only to the following extent:

1. amounts allowable as deductions during the taxable year without regard to whether the activity was engaged in for profit are allowable in full (e.g. home mortgage interest, real estate taxes, etc.);

2. amounts that would otherwise be allowable if the activity were engaged in for profit and that would not result in an adjustment to the basis of the property if allowed are allowed only to the extent the gross income derived from the activity exceeds the deductions allowed or allowable in (1);

3. amounts that would otherwise be allowable if the activity were engaged in for profit that would result in an adjustment to the basis of the property if allowed are allowed only to the extent that gross income derived from the activity exceeds the deductions allowed or allowable in (1) and (2).

Greatest Misconception:  "Income from my hobby can't be taxable." The operative word here is "income." It's taxable.

Deduction Limitations: If your gross income from this endeavor has a profit for 3 or more of 5 consecutive taxable years then such activity shall be presumed to be for profit. In layman's terms: you can claim a loss for only 2 out of 5 consecutive years. After that any deductions can ONLY offset income. Exceptions exist to this rule but only a tax professional can tell you if you fit the criteria.

Proving you are a business and not a hobby: At a minimum, you should have a name for the business, some stationary, invoices, a separate bank account, separate books and records, a place in your home that is used only for this business activity and some records to show that you are spending some time working on this activity on a regular basis. A daily log or journal would be a substantial help in this regard. A formal business plan showing your projected income and expenses over a five or ten year period – with some profit at the end of the period – will be a huge advantage to you if you are questioned by the IRS. It would also help you to be able to show that you are actively studying and learning how to be financially successful in this activity. Attending seminars, subscribing to trade magazines or newsletters, buying (and reading) books about the business and consultation with various professionals will also help.

For additional questions or advice contact Kara

A big thank you to Pavarti for her presentation at the Indie Book Event and for providing this extra information for my post.

An excellent resource with additional information is "Creating a Business Plan for the Indie Writer" by Suzan Harden.  For more information and a coupon code, go here.

Any readers who have set up their own publishing businesses are welcome to weigh in on any of these points and add any tips.  Have you found this useful?  What questions would you have before embarking on setting up a publishing business?  Please share in the comments!