"Ed Zollars, CPA" <ezollar[at]mindspring.com> writes:

- quote -

This would be the case for my relative.

- quote -

That's intriguing (though inapplicable in the case I'm
interested in). Out of curiousity, just how would one report
non-SE income from a business that wasn't SE income? Use a
dummy Sched C (that isn't filed) to figure the net income
from the activity and just report that net income as "Other
Income" directly on Form 1040? Or attach the Sched C but no
Sched SE and exchange a lot of letters with the IRS?

--
Rich Carreiro rlcarr[at]animato.arlington.ma.us

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AES/newspost <siegman[at]stanford.edu> wrote:

- quote -

That simply, no: you still own the _copyright_. (If you
are, or become, famous, they can auction off the manuscript
for themselves.)

Perhaps you can gift them the copyright prior to the
contract; but I'd advise getting good legal advice first,
because that can complicate the contract.

Seth

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Rich Carreiro wrote:

- quote -

Well, the hobby rules are really the "hobby loss" rules of
Section 183. Those shouldn't be confused with the question
of whether this is subject to self-employment tax, which is
a different analysis entirely--you look at similar issues,
but not the same ones. Section 183 begins with a simple
line:

"In the case of an activity engaged in by an individual or
an S corporation, if such activity is not engaged in for
profit..."

You have admitted your relative intends to make a profit and
almost certainly *will* make one. Therefore, this is not a
"hobby" per Section 183 simply via that fact.

As to whether it is self-employment income--well, that's a
different issue. However, I presume the technical book is
in a field related to his normal trade or business (and even
if he's an employee, he still *HAS* a trade or business).
In that case, it appears that it would meet the test of
being self-employment income from a trade or business and
therefore subject to SE tax. This is merely an extension of
the trade or business he regularly participates in--kind of
like if I wrote an article on tax matters for a fee (which,
by the way, many of the tax publishers don't pay <grin> ,
telling you it's the prestige of the thing you should be
interested in).

Now, if the book were about a subject unrelated to his trade
or business (say he was writing the Great American Novel),
the answer on the SE level might be different.

--
Ed Zollars, CPA
Phoenix, Arizona

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My understanding (supported by my professional tax
preparers) has always been that "book royalties", though
reported on Sched E, are considered self employment income.
As a result, although I was usually already maxed out on the
total annual contributions I could make to tax deferred
retirement plans based on my regular (college faculty)
income, I could also put 20% of book royalties (and
consulting income) into a separate Keogh each year, over and
above max contributions to other retirement plans.

There was also a gimmick raised some years ago which was, as
best I recall, the following. Suppose you want to transfer
the income from a book to your children, to take advantage
of potentially lower tax rate. You can't transfer or gift a
completed book royalty contract to your children and have
the book royalty income be taxed to them, as you might with,
say, a rental property and its income stream. However, you
(supposedly) can give the book _manuscript_ as a _physical_
asset to the children; they make the contract with the
publisher; and income now goes to them. Never tried this --
may or may not be true?

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A relative very recently signed a contract to write a
technical book with a well-known tech publisher.

He has never written or attempted to write anything for pay
before and has (and plans to keep) a full-time job. While
he certainly hopes this could lead to another writing
contract in the future, he's not particularly expecting it
and probably won't be expending great effort to get one
(aside from doing future revisions of the book he's going to
write), though of course times and minds change.

So my question is the classic "hobby or business?" question.

Perhaps unusually (since he expects he'll make a profit, as
his expenses will be relatively low -- just equipment
depreciation (see below) and various incidental business
expenses), it looks like it could be better for him to be
considered a business, because: * He (keeping fingers
crossed for the future) caps out on Social Security tax
from his full-time job, so his effective SE tax rate
would only be around 2.9% instead of 15.3%. * Signing
the contract has also prompted him to being the process
of replacing his 3-year-old computer. He believes that
writing the book should keep his business use of the
computer over 50%, which has the side-effect of opening
up Section 179 depreciation as an option. * Leaving aside
misc itemized deductions due to writing if the writing
is a hobby, he otherwise has no "2%" misc itemized
deductions.

So if the activity is a hobby, the SE tax savings will be
small and any of the allowable deductions will be wiped out
by the 2% haircut.

But if it is a business, he'll get the benefit of the
deductions plus perhaps could consider putting much/all of
the profit into a retirement plan, given that he already has
a full-time job to live off of.

I've read through the usual tests of hobby vs. business, and
the answers will be split. On some (like keep separate
records, carry on writing in a business-like manner,
research markets [a bunch of research went into the proposal
for the book]) the answers are pro-business. On others
(like depending on the writing income, writing on a regular
basis) the answers are pro-hobby.

--
Rich Carreiro rlcarr[at]animato.arlington.ma.us

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