Last time I mentioned the first steps of distinguishing your writing hobby from your writing business. Presumably, you’ve done that by now and want to know more about the things to do as a ‘business owner’. No? Well, call your accountant. Go ahead. I’ll wait…
Seriously, I get it. Knowing when to declare that your passion has made that leap into financial legitimacy is a tough call. To complicate things, even if your passion is classified as a hobby (aka a consistent money drain), you can still claim deductions because anytime you make money, hobby or not, the IRS wants it’s share. But we’re focusing on this being a profitable venture.
At the heart of it all, the best way to prove your hobby is really a business and to be prepared for tax day is to treat it like a business. This means doing something else us creative types generally suck at – paperwork. (Paperwork with numbers, bland descriptions, dates – sorta like the Bible without the miracles, the prophecies, the lusty sinners, and the fight scenes.)
You don’t need to do anything complicated. There’s no need to Incorporate or find a Partner or form a Limited Liability anything. As a fledgling business owner, simply operating a Sole Proprietorship is enough. You, <insert legal name here> are the business. That simple*. But you do have to do a bit of bean counting. It’s not that tough and here’s how I go about it.
First step is to open a separate checking account. All of your creative income and expenses should pass through here. It’s a step some Sole Proprietors skip which is a really bad idea. Not only does opening such an account help you fit the definition of a business, it organizes your finances. Trust me, you’ll eventually lose track and the IRS will have a tougher time calling it a hobby if you aren’t buying your Lucky Charms out of the same account you purchase your printer paper .
Next, get financial bookkeeping software. There are loads out there, some free, some not so free. (I use Quickbooks). When just starting out, a spreadsheet could work as well. You can download Open Office, for free, and get yourself up and running in no time. At the most basic level, you’re tracking operating expenses and income, so an extremely simple spreadsheet with three columns could suffice – date, expense/income details (the what and where) and the amount.
True, you can do any and all bookkeeping for your business on a notepad. You could stuff all your receipts into a unicorn emblazoned Trapper Keeper, too. But times they are a changin’. If you have an accountant, most likely they’ll want a thumbdrive instead of that Trapper Keeper. Besides, right brained people tend to make origami out of their receipts, or worse, draw offensive sketches on them which can make it hard to read the receipt and potentially embarrassing when an Internal Revenue Officer asks to see them.
Next time I’ll tackle the specifics of income and expenses. Any questions?
* Disclaimer – Nothing in accounting is simple, but Sole Proprietorships ARE pretty straightforward. Still, I can’t say enough how important it is to seek professional tax and legal advice before starting any kind of business venture. You want a good number cruncher on your side and often, they’ll sit down and talk to potential clients free of charge.