More Tax Tips For Self-Published Authors

Author : edwardamaya
Publish Date : 2021-04-15


More Tax Tips For Self-Published Authors

Most self-published authors are probably more comfortable writing books than publishing them.

These days, many services and resources are available to help an aspiring self-publisher. As publication approaches, however, these considerations will inevitably begin to shift. As you move from manuscript development to seriously preparing your book for distribution, your principal business activity changes from writing to publishing.

Once you have completed necessary pre-publication tasks, including layout, cover design, illustration and copyediting, you will need to determine how you plan to distribute your book. A variety of options are available to you, depending on your preferences and your budget. For example, you could hire a full-service self-publishing company, which can offer editing and design functions as well as distribution and marketing. On the other hand, you could focus on online retail distribution with an e-publishing service or work with a print-on-demand service to produce physical copies as demand dictates. The pros and cons of these options are beyond the scope of this article, but each choice can create different tax consequences.

If you choose to hold a physical inventory of books rather than stick to digital or print-on-demand, you will need to allocate production costs, such as materials, labor or anything else related to preparing physical books for distribution, to cost of goods sold (COGS). This allocation is an application of the matching principle that attempts to align the costs of producing inventory to the income that inventory will generate. For advance reader copies, other review copies or any promotional copies you may use for marketing, you can only deduct the COGS, not the book's retail price per copy. There is little to no COGS for e-books, because the costs to produce an individual copy are negligible.

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Once your principal business activity has shifted from author to publisher, technically you are no longer a "creative individual" exempt from the uniform capitalization rule, or UNICAP. Whereas an author typically capitalizes only a manuscript's direct labor and materials costs as COGS, UNICAP requires publishers and producers to reasonably allocate indirect costs between production and nonproduction activities. This is because certain costs, such as utilities or depreciation on machinery, indirectly contribute to the production of inventory and should be added to the cost of that inventory, rather than deducted immediately. The steps to this calculation are too complex to discuss here in detail, but the simplified production method found in the Internal Revenue Service regulations is recommended. Those who do find themselves subject to UNICAP are better served leaving its complex application to a qualified professional.

There is a major exception from UNICAP that many self-publishers will find beneficial. Certain producers using the simplified production method to comply with UNICAP are exempt from actually applying UNICAP in any year that the business's total indirect costs do not exceed $200,000. This should exempt the majority of self-employed, self-published authors from the UNICAP headache, since most expenses will be directly related to producing the book itself versus indirect activities.

You will also need to determine how you will handle sales if you do not select a service that will handle them for you. If you do not use a service already affiliated with an online retailer such as Amazon, you will probably want to create a website that is equipped to deal with sales transactions. There are many credit card processing services available; PayPal is very popular, but is not the only choice. At a minimum, if you are processing credit card payments, you will want a Secure Sockets Layer (SSL) certificate to ensure that customer data is properly encrypted. Here, as with editing and design, you may also choose to hire a contractor to build, maintain or promote your website. If you do, you will likely need to collect a Form W-9 from the freelancer.

If you sell your book directly, you will also need to pay attention to sales tax. Even if you do not choose to sell your book through your own website, you may hand-sell copies at speaking engagements or trade shows. While sales tax is paid by the purchaser, it is up to the seller to collect the tax, and rules vary from state to state. If you are regularly selling books without a third-party middleman, online or otherwise, you will likely need to register as a business with your state's tax department.

For authors who select a print-on-demand service, it is possible to avoid paying sales tax on your own book by securing a resale or seller's certificate to establish your intent to resell those copies. This is different from a business license, and you can often obtain it online through the state agency in question. Providing the certificate to your print-on-demand service will allow you to obtain the copies tax-free; you will, however, still be responsible for collecting sales tax from the customers to whom you eventually sell the books.

Similarly, if bookstores or other retailers buy books from you for resale, you do not need to collect sales tax because the store itself will do that when the books are sold. You do, however, need to keep records of such tax-exempt purchases. Most states will require you to obtain a copy of a seller's permit or a special form for purchases made for resale. Nonprofit organizations that can buy copies without sales tax will also have a permit or form to prove their status. The state may require you to produce your copies of such documentation to prove you legitimately did not need to collect sales tax in such instances.



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