Good afternoon, ladies and gentlemen. Our conference chairperson, Mary Kay Switzer and I agreed that I have been preaching about royalties for too long at TAA conventions, so we decided to go back to a topic I did five years ago, and this topic is a concern to every author, no matter how contented he or she may be with the publisher ...we're going to talk about TAXES! We should have plenty of time at the end of my prepared remarks for questions, both specific and general.

I have no knowledge of your individual familiarity and/or expertise in tax matters, but I will be candid in saying that those of you who prepare and file your own tax returns, without professional assistance, are an endangered species. As one of my CPA colleagues remarked a few years ago, " The Tax Reform Act of 1986 was misnamed; it was really the full employment act for CPAs for the next 20 years." The issues I want to share with you are generic to all entrepreneurial undertakings, and I truly believe that being an author is a business!

Let's start on a very elementary point. An author should never record his or her royalties on Page 1, Line 17, of Form 1040, even though the caption for that line reads: Rental real estate, royalties, partnerships, S Corporations, trusts, etc. (attach Schedule E). Your heirs can record their share of your royalties there, but you belong on Schedule C, or elsewhere. Authoring is a business, and carries with it all the attributes of business expenses, deductions and credits allowable to businesses having no interest in intellectual property. Authors can incorporate, and then have a choice to file as a "C" Corporation, or as an "S" Corp. Two or more authors collaborating on a work could file as a partnership, but that could pose major contractual and later, estate problems, but it may be a viable tax option. Additionally, you may want to consider a limited liability company (LLC), or if there's one or more co-authors, a limited liability partnership (LLP).

Any author who gives his or her (US) Social Security number to a publisher is doing something wrong, in tax planning! If you are operating under Schedule C, you should have an employer identification number (EIN), also 9 digits, but the format is XX-XXXXXXX, instead of the social security number's XXX-XX-XXXX. You should also be using an EIN if you are operating in corporate, partnership, LLC or LLP format.

Authoring, as a business, is a great tax planning vehicle. It can provide pensions for the author (and spouse), college tuition funds for children, and legitimate tax deductions often overlooked or otherwise unavailable. I am not advocating any illegal actions, rather, utilization of reasonable and proper tax advantages.

Prior to the enactment, in almost every state, of legislation for the creation and recognition of LLCs and LLPs, I always believed in the Subchapter S entity, known to some as a Small Business corporation. Simply stated, for Federal income tax purposes, the stockholders of the Corporation are generally taxed as individuals, bypassing the "double taxation" of corporate shareholders' dividends. To those of you for whom limited liability is important, an "S" Corporation conveys the same liability "protection" as a traditional "C" Corp. Many states have different taxation rules for "S" Corps. (different than the Federal treatment), so one should consider your own local tax status. Similarly, your own attorney and tax practitioner should be consulted on your state's treatment of LLC's and LLP's.

For those authors who work at home, and file as a self-employed individual, there is a special form (8829), for reporting and deducting those expenses. Note that Form 8829 prorates such otherwise-non-deductible household expenses such as insurance, utilities, even housekeeping and lawn and gardening outlays. Here's a "good news/bad news pointer":

If your Form 8829 expenses turn your authoring business from a profit to a loss, the excess expenses, i.e. the loss, are carried over to succeeding years, until they can be utilized.

As for business expenses of the author, general business rules apply. Section 179 allows immediate expensing, in the year of acquisition, of up to $18,000 (in 1997), of most types of business furniture and equipment. New word processing (or computer) equipment, plus office furniture could all be written off in the year acquired if the cost did not exceed the net income; if it did exceed net income, the excess could be carried over to succeeding years. Needless to say, TAA dues and the expenses of attending this convention are deductible by the authors in attendance. Note that the IRS will not include casino "deposits" as deductible convention costs.

Once you (and your tax adviser) are in agreement that you are a business, the decision as to form is always subject to personal considerations. As a sole proprietorship (Schedule C), "salaries" paid to family members are not deductible to you, and not taxable to them. But perhaps it would make good tax planning for the income to be taxable to the family members. If so, then operating via a Corporation, forces taxability. Are there children who help out, or could work in lieu of allowances? Salaries to them are taxable to them and not includible in the author's (and spouse) taxable income. The Kiddie Tax does not apply to earned income! The children could be (minority) stockholders in a Sub S corporation (or members of an LLC), yielding other types of tax advantages. Simply stated, there are multiple tax saving scenarios available to authors. That the authorship activity is part-time, in addition to other salaried or consulting income, only enlarges the tax saving potentials. For the author who is able to look upon his or her royalty income as additional funding for later retirement, there are fantastic opportunities to apply these funds just that way, and get tax deductions for the retirement provisions. If you've been following your local banker's suggestions about how much of your royalty income you can shelter for retirement purposes, chances are you've been getting incomplete advice. Put another way, if you want to put away most or all of your royalty income toward retirement, it can be done.

There are a number of expenses for which there appears to be "choice" as to where they can be deducted. Without taking a great deal of time here, trust me when I say that the "best choice" is always directly against royalty income, not as a miscellaneous deduction on Schedule A. There was even a Tax Court decision that said that a portion of the cost of preparing an individual (or joint) tax return is subject to the 2% Miscellaneous deduction rule on a Form 1040. When a portion applies to the business affairs of the taxpayer, that portion, entered on Schedule C, is totally deductible. Such expenses of a corporation are totally deductible.

Let's turn back now to the actual return, and I'd like to show you some practical pointers that can save money, or, just as important, lower your profile to the IRS.

What is your occupation? If you are other than a full-time author, that is, you also receive a salary from a college or university, never combine the occupations, and don't hyphenate them on either Page 2 or Schedule C. You are an employee of the university, but your authoring activities are totally separate. As an author, you ARE entitled to a deduction for household expenses, but not as an instructor or professor. Since the school is your place of business as an instructor or professor, the home-office deduction is generally barred to you. But an author's place of business is NOT the college or university-provided office, but that office is at home! And on the Schedule C, or corporate or Partnership return, if that's the way you elect to file, your business is "Author," and the principal business code, is 7880.

Let's talk about Social Security. With a Schedule C, your royalties are subject to Social Security, but only the net amount, after all deductions (except pension). Here's a semantic caution:

If your royalties are from editing a series of books, don't use "editor" as your business; stick with author! Why? Because free-lance editors are on the IRS (and some states') lists of employees masquerading as independent contractors. Don't get anywhere near that morass....just call yourself an author, not an editor, senior editor, or any gradations thereof.

And only the amount up to $65,400, including salary paid from all sources, is subject to the full 15.3 percent. As an example, if the college stipend is $50,000, then only $15,400 would be subject to self employment tax in 1997. Any amount above the combined $65,400 is subject only to the gross medicare rate of 2.9%

What about that car you bought with part of the royalty advance from your next book? How about the depreciation on that vehicle ... it should qualify for a business deduction, and there's no commuting element if your office is in your home. Let's not get off into a discussion about leasing; leasing is a financial, not a tax-driven decision. And if you are into sports utility vehicles, the biggest ones may yield an unexpected tax windfall. The New York Times this week eported on the Ford Motor Company's plan to offer a gigantic Sports Utility Vehicle in two years. Weighing in over 6,000 pounds, it would not be subject to federal luxury tax on cars costing $36,000, or to the gas guzzler tax, or to elongated depreciable lives, solely because all of those regulations relate to vehicles weighing less than 6,000 pounds.

In summary, authors are entitled to all the business deductions available to doctors, attorneys, even CPAs. In fact, by the very nature of the creativity process, there may be deductions available to authors that the mundane professionals can't use. Investing in some (deductible) professional help may enable you to become much more "profitable," on a net-after-tax basis. I am not soliciting for business, but I am emphasizing that you are not "saving money" by doing your own tax filings ... you're overpaying taxes!