Taking Stock of Your Financial Matters!

By Eve Loren Munsky

When I told one of my employees that I was going to write my first column on taking stock, she said, “You mean, like buying stock?” which made me laugh because it is something I am so notoriously bad at. I often say that the best investment help I can give my clients is to buy the stock they are thinking of purchasing. If they give it a little time, the price is destined to drop, and then they can purchase it at a much lower cost.

So I said, “No, these are writers, when they talk about taking stock it’s in the more esoteric sense.” She looked a little apprehensive. People tend to feel more comfortable engaging accountants in investment rather than philosophical discussion. I think it has something to do with our reputations for being well versed in the mundane rather than the arcane. However, being my esoteric self, I assumed my topic would be more in line with “another year is coming to a close and what do we have to show for it?”

I am sure I don’t have to tell you--for many creative sorts, life is feast or famine.    Because writing is so close to the soul, however, writers don’t often look at their efforts as business property. Frequently when I ask new writers if they are tracking their expenses, they tend to look at me a little strangely and say, “But, I haven’t had any income,” which makes the tax advisor in me cringe.

My philosophy is that as different in the details as varied businesses can be, their basic cores are very similar. Everyone is trying to sell something, and every business has costs and administrative expenses. Writing a novel is a lot like building a house on speculation.  While builders costs might include wood and nails and writers'  paper and toner, both buy tools -- hammers and saws for the builder, a computer and its thesaurus for the writer, and both have recurring charges for things like telephone, office supplies, and marketing expenses.  When both are done with a project, they have something saleable as well as a collection of costs. Some costs are directly related to that specific project and others are part of all their business projects.

As accountants, one of our jobs is to separate these costs out. The ones that we determine are directly related to one specific project we refer to as costs (more formally cost of goods sold), the ones that a business would have regardless of project, we call expenses – a service plan on your computer or monthly telephone charges on a business telephone line, for example. For most businesses, on an annual basis, when they file taxes, expenses are deducted. However, the direct costs of doing a project are collected in a little holding area (we call the balance sheet). Sometimes you will hear this referred to as capitalizing expenses. When the project is sold these costs come out of hiding to get deducted against the selling price before computing tax for the year. Writers and other artists are special, however. They are not required to capitalize their costs. They can make deductions for them in the year they spend the money. They can make the deductions, but they don’t have to.

The two reasons this is important are:

• IRS has rules that make taking losses in the same business over a number of years susceptible to scrutiny, which is not always pleasant. Depending on your situation, you might want to limit losses by capitalizing expenses. 

• If you have not already made deductions for your expenses, but the projects they relate to are unsold, you still have a chance to compute the reasonable cost of producing the project to lower your tax bill upon its sale.

Unless you are incorporated, you are not required to present IRS with these collections of costs until you actually make a sale. Of course, everyone’s tax situation is different and there are a lot of factors that go into determining if a writer should deduct his or her expenses in the current year or capitalize them.  Other income for the year, spouse’s income, number of years of loss, expected future earnings are examples.

That stated, it makes sense to go over your expenses for the year with your tax advisor, even if you have no income from your work, and/or also to inform him or her of any prior un-deducted costs on projects you sold in 2004.  It's never a bad idea to take inventory and see what you’ve got on the shelves.  Note that you can fully deduct the cost of a project that you have determined has become un-saleable. For example, if you wrote an article a couple of years ago on the merits of investing in WorldCom, you could probably assume that this is “worthless stock.”

If you are concerned about your 2004 tax bill – buy yourself a nice after Christmas present that you can use in your business and/or pay some upcoming business expenses with your check dated on or before 12/31/04. As long as you are on the cash basis (which most non-corporate businesses are), you can deduct these expenses in 2004, whereas expenses paid 1/1/05 need to wait a whole year before they can be deducted. Also, my end of year mantra – clean your closets!. Donating used items to charity gives you a painless tax deduction. The Salvation Army determines that, for example, the value of a used computer can be as high as $600. As long as you itemize your deductions, that is a nice little write off for something you probably don’t use.

I am looking forward to sharing a little more in depth tax and business insights with you in the coming months.  Happy New Year to all.