Don’t muck things up

John R. McCarthy —I’ll call him Johnny—retired from Rocketdyne, Inc. He’d worked as a scientist and engineer for 35 years writing technical and scientific proposals. Thereafter, he still worked, but was self-employed, utilizing his prior experience.


On various Schedules C, Johnny listed his “principal business or profession” as writing, investing, job shopping, art, engineering, science, consulting, teaching, photography, and research. (A bit unfocused, eh?) Johnny stuck some royalties, interest income, and lecture fees characterized as business income on the Schedule C pertaining to writing. Despite asserting that he used those resources to pay for writing expenses, such income didn’t derive from any writing he had done. Johnny should have reported these royalties and fees as “other income” and the interest income on the interest-income line on his tax return.

The court said that Johnny’s expenses which truly related to writing couldn’t offset such income which didn’t come from writing. Everything Johnny did made it look like he was confused and undecided. To use a cliché, Johnny was a jack of all trades and a master of none. The expenses he listed on various Schedules C related to his writing activity all right. Writing was the only activity he really engaged in with regularity. Concluding that he should have reported everything on a single Schedule C pertaining only to writing, I’ll bet you’re not surprised to hear that the court concluded that he lacked a profit motive. He hadn’t generated any writing revenue. While aspects of his activity were managed in a businesslike manner, Johnny couldn’t explain how he expected to recoup his substantial losses. A sound, focused business plan and accurate and complete financial and non-financial records could have helped—both in making his business profitable and in convincing the IRS he had a “profit motive.”

Don’t muck things up. Forget trying to disguise income from other sources as income for expression activities. That’d be crazy. Keep records—business and non-business—that present operations clearly, completely, and succinctly. Remember the bard’s advice: brevity is the soul of wit. Mind your debits and credits if you use them. If not, don’t scrimp on accuracy, meticulousness, and using the data germane to and used in conjunction with a vibrant, viable and compelling business plan. Make it crystal clear that you have a plan to succeed as a writer—that your goals show that you plan to be as successful as J. K. Rowling or Dave Barry. If you’re convincing enough, you’ll never have to worry about convincing the IRS that you’ll recoup your losses.


Non-financial records should include databases of contacts, customers, and consultants, along with their pertinent information. If you’re a writer, you should keep track of the hours of your writing, researching, and editing. You should have a database to show details about your submissions, including the title of the work, where you submitted it, the date, follow-ups, responses, sales, etc.
One further thing: keep your expression activity records separate from personal records and other business records. Have separate expression activity credit cards, debit cards, checking and savings accounts, and accounts at your favorite vendors. If you have more than a single proprietorship, don’t ever intermingle them. Doing so may subject you to ridicule.

Integrate Financial and Non-financial Records into Your Dynamic Business Plan

Sloppy books and jumbled records can point to a hobby. In one case the Tax Court said, “The record . . . is vague and confusing. There is no clear picture of the exact nature of [the taxpayer]'s recording activities. Nor is there a clear picture of how and when, if ever, these activities are going to result in a profit.” The court goes on to say:

…the record was incomplete, without evidence of an organized, businesslike attempt by [the taxpayer] to engage in an activity for profit. [He] did not introduce evidence of long-range planning or of organized recordkeeping. Nor did he introduce evidence to prove that he had regular customers and receipts— normal attributes of a profit-making enterprise.

Moreover, in many instances the evidence which appears in the record tends to indicate that [the taxpayer]'s activities were motivated by pleasure rather than by a desire to make a profit. At no time through the end of the taxable year in question did [taxpayer] hold himself out to the general public as being engaged in business. Indeed, [the taxpayer] did not even carry on his recording activities during the year in question.

So be certain that your records—financial and non-financial—present a clear picture and the exact nature of your expression activity. Integrate financial and non-financial records into your dynamic business plan.

Plan, Pursue the Plan, Adapt

The Court in Stasewich's new case (Richard A. Stasewich v. Commissioner, T.C. Memo.2001-30. The earlier case was Stasewich v. Commissioner, T.C. Memo.1996-302.) said:


"[Richie] has not made any significant changes in the operation of his artist activity, during the years in issue here, that would create a market or allow him to benefit from a market for his artwork or allow him to make up for his substantial losses. In [his earlier case before this court], we explained [that] ‘The large unabated expenditures, the absence even at this late date of any concrete business plans to reverse the losses, and the manner in which [Richie] conducted his artist activity lead to the conclusion that this was not an activity engaged in for profit."

Make a business plan and make it live. Your new business should change and develop just as a new baby grows and matures.

Formulate a Plan

After I retired from a long, long career with the IRS. I wanted a change of pace. I still wanted to utilize skills and experience garnered over the thirty-four years I worked for the IRS as an Appeals Officer. Yet I wanted to go in a new direction, and make money doing it!


Like you, I’d dreamed of making my expression activities profitable. I had a long almost-written novel under my belt that my critiquing group seemed to like..My short stories had won a writing competition or two. I’d had some things published in the newspaper. Up until then, though, I'd been dabbling, puttering around, dreaming big—like most of you. Writing had been my hobby. Okay, how did I transform it into a business?

I can imagine you shouting at me: “Walt, after working that long for the federal government, especially for the IRS, your judgment and work ethic must be shot. Surely you can’t be serious about making money by writing. I advise you to buy a lottery ticket, sit back and relax with a cold drink, and forget writing to make a profit. It’s a pipe dream.”

Perhaps you’re right . . . about the lottery ticket. By now you should know I believe in true grit. So let’s move on.

First, I made my plan. Mine started as follows:


Summary

“Make expression less taxing” was my mission statement . . . at first. It changed as my business progressed. At the time it gave clarity to my plan while leaving room for imagination. Eventually I planned it would become “Make expression very profitable.”

This was a start-up. I’d begin when I retired from the IRS. I’d write books and articles to self-publish and them market myself, or sell them through conventional methods—utilizing agents, editors, publishers, etc. I’d participate in local writing societies and critiquing groups, hoping to gain feedback from those who read and write in order to hone my craft.

I’d write from home or wherever I happen to be in the course of my expression activity or my personal life. My business would entail travel and entertainment.

My primary marketing tool to begin with was to be a self-help book about making expression activities less taxing, thus paying less to the IRS and related state and local income tax authorities. I’d speak publicly. The value of my presentation would command the cost of travel and a speaker’s fee. I’d utilize speaking engagements and the sponsoring platforms to market my books.

I'd also do professional representations of taxpayers engaged in expression activities who have problems with the IRS.

Since my retirement pension would be less than my salary was when employed, my goal would be to profit from this new business sufficiently to make up the difference. After that I’d aim to net an amount equal to my pre-retirement wages. Subsequently, I’d steadily increase revenues, hoping eventually to make a generous income and gain a solid reputation that could command respect and attention in the publishing world.

Initial sources of revenue would be the sale of my book, Making Expression Less Taxing, and fees for speaking on the relationship of expression activities and taxation. I’d augment this revenue by representing clients with federal tax problems relevant to expression activities with the IRS.

I suggest you start formulating your own business plan like I did.