April 15, 2008 is this week

Wednesday is the due date for filing individual income tax returns. It is a day to account for income earned in 2008. The law actually gives taxpayers a grace period from January 1 to April 15 to settle up for 2008.

Lots of taxpayers don't recognize that the income tax system taxes them throughout the period of their efforts and pay. A person owes tax throughout the particular year they work; it is a pay as you go system. Therefore, taxpayers who work as employees are required to have income taxes and FICA withheld and paid over throughout the year that they work. Self-employed individuals are required to make estimated tax payments to cover the taxes they will owe on the income they earn as they go along. If the withholding or estimated tax payments aren't adequately sufficient, penalties can result.

In any event, if the taxpayer gets in trouble in a subsequent year for what they put on their 2008 income tax return, and they have to pay additional taxes, they will also have to pay interest calculated from April 15, 2009. On the other hand, if a taxpayer discovers an error they made on their 2008 income tax return sometime next year or the year after, and they make a claim for additional taxes to be refunded because of their mistake, the government will owe them interest on the amount due to them because of the same rationale. Now, for what it's worth, Congress didn't make it entirely evenhanded. The interest rate you pay on underpayments of tax is in excess of the interest rate you receive on overpayments of tax. Now, you would have guessed that, wouldn't you? You know, you are dealing with politicians who were elected to represent you and your government.

WRITE NOW

An old joke goes that the Postal Service recalled a new stamp because they pictured Internal Revenue Service agents on them. The problem was people couldn't figure out what side they should spit on

We've come a long way. We don't spit on stamps anymore.

How about revenue agents? Would we just as soon spit on them? One theory I have about the current economic meltdown has to do with the inadequacy of our Congress to fund the enforcement of the laws that it has enacted, including the Internal Revenue Code

Another witticism asks, "What do you call twenty-five tax auditors buried to their chins in cement?""Inadequate cement."

This kind of thinking, I believe, got us to where we are financially as a nation.

If you're going to be a writer professionally, act professionally. Write! Take writing classes. Formulate a business plan. Join a critiquing group. Attend a writers conference. Pitch what you have written to publishers and agents. Submit pieces to contests. Keep business records. Model an exemplar. Get published. Write!

MISCELLANEOUS ACCOUNTING STUFF

This year it is likely that a lot of people have lost value in their investments, but it doesn't necessarily follow that they will have losses on their income tax returns that are due beginning April 15. However, some may have losses from other than investment. If they were ripped off, they can take a theft loss. But there are a lot of ifs even in that. A person has to make sure there is not some possibility of a recovery through a lawsuit or some other means. Timing is also important. The theft loss has to have occurred during the taxable year it is claimed.

Sometimes all of the qualifications and criterion stink like Yellowstone sulfur pots.

Our elected officials who make the laws are often fatheads. If they weren't, we probably wouldn't be in this financial mess we are in as a nation.

Accounting is a yawner and accountants are... well, lackluster. Uninteresting. Boring. Nonetheless, it is important if you are in a trade or business, to pay attention to at least rudimentary accounting. That doesn't necessarily mean you have to know what debits and credits are or that you have to hire a professional accountant like a CPA. But if you do choose to hire somebody to help you, make certain the individual is someone you can trust. And I would say, don't continue to give that trust without checking up yourself on the individual and their work.

Ultimately, you are responsible for your system of accounting and what you claim on any return. The accountant is not generally responsible. There are exceptions of course, but this involves the law and by now you should know that the law always has its complications and exceptions, etc.

Sloppy books and jumbled records can point to a hobby. You want to avoid that.

RICHIE, THE ARTIST AND ACCOUNTANT

Congress makes plans. It plans on some people and businesses paying taxes --- but not everybody. It exercises intricate legislative planning to allow certain contributing constituents to avoid taxation, but not others. Often when the public discovers hidden taxes, Congress's solution is not to do away with the concealed taxes, but to hide them better. In similar fashion, you have to plan well and to follow your plan to show that you are in business to make money, whether or not you have made money yet.

Ritchie --- my nickname for him --- from Chicago attended Northern Illinois University between 1971 and 1977. He majored in art and minored in accounting, quite a combination. He never did graduate. But by 1978 he had passed the CPA exam and was in 1983 in Illinois practicing as a CPA. Between the years of 1978 and 1984 he held various positions as an accountant.

From 1992 to 1995, Ritchie operated his accounting and artistic activities out of the building where he both worked and lived. He started treating his artistic and accounting activities in 1984 as sole proprietorships. That is, he filed two Schedules C. Those activities from 1984 to 1998 reported the following losses and profits:

Year	Artist Activity	Accounting Activity
1984	($544)	($3,272)
1985	(1,966)	6,334
1986	(617)	7,201
1987	(1,978)	10,063
1988	(7,959)	9,518
1989	(27,638)	16,824
1990	(27,300)	19,977
1991	(26,930)	26,930
1992	(31,774)	17,385
1993	(13,419)	13,419
1994	(18,384)	20,821
1995	(10,922)	19,951
1996	(934)	26,888
1997	(1,586)	17,737
1998	(4,071)	-0-

 

Richie never garnered much gross income from his artistic activities. His gross income from artistry from 1992 to 1995 was only $770, $320, $266, and $357, respectively. Thus, we see that his personal maintenance and sustenance all came from his accounting work. When he got audited by the IRS, he was able to produce good financial records to show that he had incurred all of the expenses that he had claimed. What he didn't keep, however, were records of a budget for financial projections for the artistic activity. He didn't predict the costs he might incur in attempting to develop his artistry. Thus, he hadn't planned well. So at trial it didn't go all that well for him.

Ritchie had at first decided to create a commercially viable product from nude drawings. It apparently didn't work out. He also tried fashion illustrations and spent lots of money for props and materials. That also never worked out. He never received much of a clientele and obviously never earned anything from it. Next he tried portraitures and then installation art displays. Maybe he did those two concurrently, I don't remember. Anyway, for $1,200 he placed two advertisements in his newspaper to solicit work. Between 1992 and 1995 he received two commissions for portraitures that generated about $850. From 1992 to 1995 he also created four displays of installation art --- of peppers, dolls, pumpkins, and cucumbers --- which he exhibited in front of his residence, trying to sell them or the concept. The media did two newspaper articles on the dolls in 1994, and mentioned it in another newspaper article in 1995. They apparently weren't too upbeat on peppers, pumpkins and cucumbers. His income from installation displays totaled a measly $88.04.

IRS audited Richie. First it took on 1988 through 1991. He lost in the Tax Court. That didn't deter him from claiming additional losses from 1992 through 1995. Again he took the matter to court. The court in the new case said:

[Ritchie] 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 [Ritchie] conducted his artist activity lead to the conclusion that this was not an activity gauge tin for profit.'

Make your business plan. Live by it. It should change and develop just as a new baby grows and matures.

See Richard A. Stasewich versus Commissioner, TC Memo. 2001-30 and TC Memo. 1996-302.

PREPARATION PRECEDES POWER

Sarah Lesher had a couple of appalling encounters with the IRS

She didn't adequately prepare before claiming her losses.

From 1976 to 1980, she was employed at Yale University as a research associate and a computer programmer. Eventually she learned about a publisher of travel guides that needed information for a revised edition of an African travel guide. Sarah got in contact with the publisher and received information regarding the submission of articles for the travel guide.

Sarah travel to Africa in October 1980 and then to Israel in January 1981. While in Israel, ostensibly to gather information for her writing activities, the Weizmann Institute employed her as a computer programmer. She bought a typewriter and wrote a draft of a fictional work based upon her adventures in Africa and Israel. However, she apparently didn't keep any type of business or accounting records of her writing activities. Nope, Sarah thought she could get by without making any debits or credits or keeping any other kind of financial or non-financial records.

As writers anxious to deduct our costs in writing and researching, we need to pay attention to Sarah's case as an example of how we might do things better than she did.

In September 1981, Sarah left Israel for Europe and their return to the United States at the end of November. During 1981 she incurred a total of $9,847.13 in expenses connected with her travels. She deducted it on her Schedule C of her Form 1040 for 1981. Once again in 1982, Sarah traveled to Africa, possibly for research and gathering material for the travel guide she had found out about earlier. She resumed working as a computer programmer there.

But apparently Sarah lacked experience writing any type of literary work prior to her trip. She hadn't published or sold anything and didn't sell or publish anything she wrote with respect to her travels by the time she got to the Tax Court trial. And by then she still hadn't engaged a literary agent to help her publish her work --- the Tax Court judge clearly didn't know how difficult it is to get a literary agent. It apparently didn't need one to publish its opinions on Sarah's cases.

Sarah didn't ever show the court that she had traveled to Africa, Israel, or Europe primarily to write, or that she had remained in Israel in 1981 to author literary works that could make her money. The court ended up saying that Sarah had used her fiction manuscript as a pretext to claim her travel as a tax deduction. Essentially, the court said that Sarah's fiction was a fiction.

Sarah actually introduced several hundred exhibits, including a copy of the draft of her novel. The submissions included correspondence and information concerning the accomplishments of her ancestors, her friends, and her acquaintances. It detailed her personal life, her activities for many years before and after the years in issue, and it even gave the backgrounds of various authors. Nonetheless, the court said Sarah had used her draft novel as window dressing to support her claims to deduct travel expenses.

Plan, plan, plan on it.

Almost everybody wants to write, don't they? Doesn't just about everybody think they could write a novel? Or a memoir? Or some kind of nonfiction book on their expertise

And I suppose it's true that everybody could write a book on something. Not that it would sell or that anyone would be interested in it. It's easy to dream about doing it, but it's hard to make a plan and then live by it and get it done. For a long time before I retired I thought I could write a book. It all started when my wife's cousin left her husband. It's her fault.

Bless her.

Betty (names have been changed for the standard reason given) left my fraternity buddy, Bob, who had become her husband for a polygamist. They had three kids by then and she planned to take them with her too. I felt so badly for Bob, who I could tell loved his wife and his children more than anything.

It was too difficult to wrap my mind around, so after my wife and I got over spying on her with the guy, I decided to write a story about it. It all eventually transformed itself into a story about some Catholic gal from the Midwest who left her spouse for a Western polygamist. So for me writing a novel started out quite haphazardly . . . unplanned. From that initial beginning, I started getting more and more organized and making more and more plans.

Anyone who wants to make their writing business better needs a plan. And such a plan shouldn't be nebulous. It should be written. It also ought to be malleable, dynamic, and able to adapt to the situation.

The United States Small Business Administration has a section on making business plans. It is also viable to search Google to find plans for writers and freelancers.

Your business plan and the Internal Revenue Code (IRC) will have something in common. Every time you reread your plan, just like the Congress reading the IRC, you'll find something you want to revise. Something you think you can make better. Something that will increase the chances that you will succeed and be able to make money in your writing activity. Your business plan should be a work in process, a series of actions, with changes when needed to bring about results.

Plan on it.

HOW MANY YEARS

Many writers who have written for quite a while but haven't had much success at making a profit ask me how long they have before they must make a profit. Most of them have heard of the presumptive rule that if you make a profit a couple of years out of five you're home free. Almost everybody that's a novice misunderstands the presumptive rule. They seem to believe that it's an absolute rule. That unless you make a profit two of five years, you're out of luck. But it's not. It says nothing about how long you have to make a profit to have a valid profit motive. There is no absolute rule to that effect. The presumptive rule just says that if you have a profit two of five years, IRS will assume you have a profit motive.

So how long do you have? Far be it from me to say with exactitude. That is not the nature of taxation or of law, for that matter.

John Ellsworth had losses for thirteen years. Big losses. They ranged from over $21,000 to over $74,000. They probably averaged around $55,000 per year. He wasn't a writer, though. He was a cattle breeder. And it wasn't as though he didn't have revenue from his activity. Beginning with the third year, he had substantial gross profit. It's just that his operating expenses above and beyond the costs of purchasing cattle exceeded his gross profit.

Another crucial factor in Ellsworth's case is that he was getting back into cattle breeding after having been successful in it in his earlier life. He was quite old --- I believe 65 --- when he entered into this thirteen-year stint of substantial losses. The court was convinced that it takes about 10 to 15 years to develop a breeding herd with the superior strain and of substantial commercial value. They were satisfied that Ellsworth devoted sufficient time and effort to the enterprise to conclude that it wasn't some lark. You don't do all that work --- even though he employed 12 full-time employees to do all of the heavy lifting --- as a hobby.

How many years does it take? Your guess is as good as mine. It all depends. It depends on whether you can convince the court of three things:

• You conducted your activity in a businesslike way
  
• You had sufficient expertise in your activity and worked at gaining more expertise
  
• You worked at your activity regularly and sufficiently