WHAT IS A PROFIT MOTIVE

The term "trade" and the term "business" are very important to writers and artisans who want to benefit relative to their income taxes. Nonetheless, the terms "trade" and "business" are undefined in Title 26 of the United States Code, otherwise known as the Internal Revenue Code. There is also no definition given in the federal regulations, an explanatory adjunct to the Internal Revenue Code. Hence, any definitions that apply have arisen in the context of court decisions. The courts have developed a couple of definitional elements. The one relates to the writers' or artisans' profit motive. The other relates to the scope of activities. I mentioned in the previous posting the notion that activities have to be on-going in order for there to be a business or trade. Additionally, there has to be a profit motive.

What is a profit motive? Plain and simple: you do your writing work or artistry because you want to make money. However, the courts have decided it isn't enough to subjectively say you want to make money to satisfy their eventual conclusion that you have the necessary motive. Just saying it doesn't cut it with them. You have to enter into the activity with the good-faith intention of making a profit. You have to believe that a profit can be made from your writing or artistry. Reasonableness has nothing to do with it. A mere hope will not cut it, though. The hope has to be accompanied with specific plans of how you are going to make money. Otherwise the writers' and artisans' assertion is not believable.

Is that all crystal clear? I know it isn't. Next time, I'll illustrate it further by telling you about the taxpayer who claimed he had created a cold fusion system that would solve all of our energy problems.

CARRYING ON

To "carry on" is to continue doing, pursuing, or operating, according to my Merriam Webster dictionary. That is the way it is used in the phrase "carrying on a trade or business." As writers and artisans, if we want the grace that allows us to deduct our expenses relative to such activity, even if they result in a loss, we must make certain that we are carrying on our writing or our artistry.

"Carrying on" can also have a negative connotation. When I used to work for the government it wasn't unusual for those I worked with to be "carrying on" about this or that. They were complaining, usually. I haven't been above and beyond "carrying on" in that vein myself.

For the purposes of writers and artisans and others who do freelancing, with respect to coming within the terms of the grace that allows you to deduct business expenses, to meet the "carrying on" test not a great deal is expected. Activity is the key. Sustained activity. If you travel to Las Vegas once or twice a year hoping to make money gambling, that won't meet the "carrying on" criteria --- for a number of reasons, one of which is that you are not carrying on the activity in a sustained manner. You are not continuing to do, pursue, or operate.

A Hierarchy of Importance

There is a hierarchy of importance in the words and phrases quoted in the last posting. The meanings of "carrying on" and "trade or business" are more important than the meaning of "ordinary and necessary" because they have broader impact. As writers and artisans doing freelancing and worried about taxation and minimizing taxes, it is important to know the hierarchy. Next time we will talk about what it means to carry on.

So for now, at ease and carry on. Sayonara.

. . . There shall be allowed as a deduction all the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business . . .

So reads the salient portion of Section 162 of the Internal Revenue Code. Section 162 goes on and on like I-80 across Nebraska. Read it at your own risk, but there is nothing ordinary or necessary in doing so. We will focus on the meanings of the above words and phrases to see if you as a writer or artisan doing your work as a freelancer qualify for a saving grace.

THE GRACE THAT CAN SAVE

In most decisions of the United States Tax Court, you'll find a phrase something like the following one: "Deductions are a matter of legislative grace, and the taxpayer bears the burden of coming within the terms of a particular statute." If you don't believe me, go to the webpage of the court and conduct a search, and you'll see. You see, "grace" comes up so often because to escape taxes on any income you need a "grace." Believe me, you need grace. So as writers and artisans who freelance, you need to know which particular statutes provide the graces you need.

Now, you might be saying, I am a new writer or a new artisan, and I haven't made any money yet, so I don't have any income. My question back to you is: so how do you live? You don't have any income, or you don't have any income from writing or from your artistry? No income from freelancing at all? If you don't have any income, you don't owe any tax. No income: no tax. Income: maybe tax. It depends upon grace, lovely grace. She's a comely lady.

So what grace do we need to focus on mostly? We need to consider section 162 of the Internal Revenue Code. Don't let the sun go down without considering section 162. (Photograph by Michael Graebler.)

ONLY GRACE CAN SAVE INCOME FROM TAXATION

A common dictionary definition of income is the amount of money or its equivalent received during a period of time in exchange for labor or services, from the sale of goods or property, or as profit from financial investments. (The American Heritage® Dictionary of the English Language, Third Edition copyright © 1992 by Houghton Mifflin Company.)

This definition, however, is not expansive enough as it pertains to income taxes in the United States of America. For example, let's say that you inherit a piano. Inside the piano you find $10,000.

Now, you didn't get the piano due to labor or services that you performed to work for anyone, nor perhaps do you plan to sell the piano, and the piano was certainly not a financial investment that you made. However, your retention of the piano may end up being an investment if you retain it, and it increases or decreases in value. In the United States, the value of the piano you receive in an inheritance is income. The same is true of the $10,000 windfall. Whether or not you will end up paying tax and in what amount though is another matter altogether.

In the United States the concept of income is intended to be as expansive as is possible. At first blush, such expansiveness seems overblown. The politicians who designed the system, though, made it work to their advantage. Relief from taxes on income could only come from grace granted by elected officials. Senators and Representatives. The President of the United States.

How convenient. Now, the critical question is what are the most important graces granted to help writers, artisans, and freelancers? That's coming up.

Taxpayers' Rights? What about Freelancers' Rights?

Taxpayer rights? You've got to be kidding, right? There is no escape from tax, is there? Death and taxes are certainties.

Well, forget the rights of a taxpayer for a moment. What writers and artisans who haven't yet had enough success to rely on a retinue of CPAs and attorneys for professional help want to know is what their rights are as writers and artisans until they can afford such experts. Can they do anything before they've even made the first buck from their writing and artistry? Is that possible?

How do the concepts expression and taxation intersect? What are the responsibilities of writers and artisans relative to their expression over against taxes? More importantly, what are the opportunities for writers and artisans in reducing or eliminating their income taxes?

Remember, though, last post we said all income is taxable. Actually all income is taxable from whatever source derived. So we must look for some deliverance, right? What can save writers and artisans--those who are freelancers--from paying taxes on all income?

Grace? I used to know a girl named Grace. She liked a guy named Michael, nice girl . . . but that's another subject. I mean grace: a favor rendered by one who need not do so. More on her . . . er it, next.

Uh-huh. Grace.

We Live and Die; We Pay Taxes

It is well established that in life we face two certainties: death and taxes. We will all die, and it is likely that we will all pay taxes. Now I suppose it could be argued there are exceptions. Religious folks often accept the immortality of various saints or prophets. Likewise, many cultures exclude the poor and needy from taxation. However, as writers, artisans, and freelancers, we can probably accept the general premise. We will all die; we will all be taxed.

Given these two certainties it behooves us as we go about our writing, artistry, and whatnot, that we exploit both death and taxes to our advantage. How we go about it in our writing and artistry varies. For example, the picture portrayed in this posting certainly utilizes a symbol of death to make a vivid statement relevant to a cholera outbreak in earlier times. In a section of an unpublished novel I took to my critiquing group last night, I had my protagonist's best friend killed off by the antagonist's hireling by running him down with a vehicle in a parking lot.

The odd thing about death is that we can never accurately report on it ourselves. It needs our imagination to conceive it. Accordingly, it has played and continues to play such a big role in literature that it is difficult to get your arms around it or to fully use it up. Writers and artists and are always conceiving new ways of making it seem real. Perhaps, more importantly, the consideration of death in some sense is the consideration of life.

Taxes are another matter. We all experience taxation. If we don't pay income tax because it doesn't apply to us, we pay sales taxes, or taxes when we buy various tickets to be admitted to entertainment, or a fare, including taxes, to ride on public transportation.

So we are constantly confronted in life with escaping death and taxes. How do we go about it? How do we escape death? How do we escape taxes? Those are questions I wish to explore here to some degree, particularly the latter: escaping taxes. I happen to know something about that because I've spent an entire career involved with taxes. More specifically, income taxes.

I also want to explore the other question, escaping death, because it plays such an important role in writing and in artistry. In literature, we constantly try to understand death and its implications. We utilize conceits associated with it like the afterlife. We contrast love with death. Our music often makes it a theme. I think, for example, of "O Danny Boy" as Ronan Tynan sings it.

Think about this. In the United States of America people are subject to an income tax. The basic principle in the US tax system is that all income from whatever source derived is taxed. Think about that, and I'll cover it some more later. Remember though, all income.

DEATH & TAXES

At least monthly, sometimes more, sometimes less, I escape. Perhaps "escape" is too strong a word. Let's put it this way: I leave the comfortable confines of my home and the company of my endearing family, leaving behind my marital and parental responsibilities, and I make my way down to the Barnes & Noble store in my community. There the Wasatch Writers Chapter of the League of Utah Writers meets to discuss writing or to listen to workshops or lectures by writers and freelancers who usually have more experience than we who attend have. Our guests are interested in sharing their writers' know-how and expertise.

I enjoy these meetings. Maybe you do something similar. Maybe instead of going to your nearby bookstore you go to the library or community center or someone's home to meet with your peers in writing leagues, associations, and organizations to enjoy their company and discuss your passion as writers, artisans, or freelancers of various stripes.

If you are such an individual, this blog might help you. If not, perhaps it's not for you. Check it out, and see what you think. It is intended primarily for those at the threshold of a business as a writer, artisan, or a freelancer. Its focus will be upon taxes and death as they pertain to writers, artisans, and freelancers. At least that's the plan.

Benjamin Franklin's statement about death and taxes has become ubiquitous. He said, "In this world nothing can be said to be certain, except death and taxes." One thing I have learned in all my years is that it is often difficult for regular folks to get a handle on either one of these subjects. In the days and months ahead, I hope to explore the subject as they pertain to artisans and writers who do freelancing. I hope to gain some sort of audience, but we shall see how that works out.