There are a few basic things every author or freelance writer should consider. I know, I know, it’s not tax season and nobody wants to think about taxes right now, but the accountant in me is here to tell you it’s incredibly important to pay attention to your business at all times of the year. This goes for any business, not just writers and authors.
Hobby vs. Business
First you need to consider whether you are actually in business for yourself. In Canada, the concept of profit is key in determining whether you are carrying on a business or simply enjoying a hobby. Profit is what you have left over after you subtract your expenses from your income.
One of the things the Canada Revenue Agency (CRA) looks at in determining whether you have a business is whether or not your business has a reasonable expectation of profit. The CRA recognizes that when you’re an author, it may take a considerable amount of time to determine if your author business will be profitable, and therefore you may incur deductible losses before your business is profitable.
Sources of Income
As a Canadian writer or artist, you must report your income from all sources, even if they are outside of Canada. The most common example of this is sales to US or other foreign customers. You must track income from these sources. Do not rely on sources like Amazon, for example, to track your sales for you. This is your responsibility and also an important step in growing your business.
To report foreign income to the CRA, you must first convert it to Canadian dollars using the exchange rate in effect at the time of the sale. It is also acceptable to use a yearly average to convert foreign sales at the end of the year if you haven’t been tracking your daily sales.
Work Space in the Home
As a writer or author running your own business, you likely don’t have an office outside your home. If this is the case, you can claim a portion of your home expenses as a business expense on your tax return. The business use of home (or work space in the home) amount is calculated using the amount of space used for your office. So, if you have a ten-foot square room you use for an office and your home is 1,000 square feet, you could claim 10% (100/1,000) of your home expenses on your business statement.
Types of home expenses you can use in the calculation include house insurance, utilities, property taxes, rent or mortgage interest, and costs for repairs and maintenance of your home. If you plan to sell your home in the near future, you will need to consider the effects claiming this deduction will have on your principal residence exemption which allows to you sell your primary residence without paying income tax on any capital gains. Be sure to consult with a professional accountant.
As with any business, writers and authors can claim any expense they incur in order to earn income. The most common expenses for authors include computer purchases, licenses to run software programs, advertising, travel expenses for conferences, and payments for outsourced work such as cover design and formatting.
Expenses can be classified as current or capital with the latter most commonly referring to large purchases for things like computer equipment costing more than $500. Current and capital expenses are treated differently on your tax return, so again, you’ll want to check with a professional accountant.
While the above information focuses on Canadian income tax, many countries have similar rules so if you are curious about any of them, you’ll want to find a professional accountant who knows your local tax laws. If you’re not sure how to go about the process of finding a professional accountant, check out my book, Keep More Money, where I explain the process and give you lots of ideas for questions you can ask to find the right business advisor.