Saturday, March 01, 2014

RECORD KEEPING FOR WRITERS

Tax Return
 (Photo: LendingMemo)

Writers who are beginning to publish and win and/or place in contests may be earning fees. The moment this starts to happen for you, the revenue from your articles, short stories, and books creates tax implications. It also marks the moment when writers have to start keeping good records of their income and their expenses incurred from making that income. Writers also need to be able to at least prove that they have a reasonable expectation of income in the future from the expenses incurred ahead of time (e.g. a signed article or book contract). 
My colleague, Eileen, is an accountant and writer and offers this advice to writers:

Keeping Records

by Eileen Reppenhagen, CGA

I’ve put together a list of useful links for writers at http://www.taxdetective.ca/artistswriters_links.html because this is complicated and writers must understand as much as they can. The top link is to a CRA website page about Keeping Records. Taxpayers who carry on a business or are engaged in commercial activity, are required to keep adequate records. Records are not just a pile of receipts, totalled by adding machine tape. (Ed. Eileen taught me to write on each receipt what and/or whom the expense was for and to put receipts in an alphabetized, concertina file each tax year, along with my contracts.)

There are special rules for writers, about evaluating whether or not they have a business, as to whether or not they can write off expenses when there isn’t any revenue expected for some time, sometimes even years if you're writing a book. http://www.cra-arc.gc.ca/E/pub/tp/it504r2-consolid/README.html. For self-employed writers, the accrual method is required to report business income: http://www.cra-arc.gc.ca/tx/bsnss/tpcs/slprtnr/ccntng-eng.html.

(Note, rules for employees who write are very different than those for self-employed writers. If you are an writer/employee, the rules for home office are different from those for work-space-in-home rules for employees.)

There is a new wrinkle this year too: ‘Indirect verification.’  This means that the income tax agency in Canada will indirectly verify by confirmation that what you deposited to your bank from your writing reconciles with your taxes. If not, you’ll be expected to explain why not. Then the CRA will want to see the actual deposit transactions, if taxpayers have income from their [writing]. The plan will require taxpayers to provide statements from bank account(s), credit card account(s), investment account(s) and any other account(s) with your name on them. These may be subject to a desk audit. So writers need to keep their bank statements and contracts for six years, preferably longer. 

Are you ready for this scrutiny? If not, what can you do to be ready for ‘indirect verification’ audit procedures regarding deposits?

  1. List your accounts, all of them, whose name is on title, and why the account is shared. 
  2. Create a folder to store each account’s statements, with the most current month on top, one file per account per year. 
  3. Document the reasons for all deposits related to your writing income. (Another reason for keeping track of all your submissions to periodicals and contests!)
  4. Add up all the deposits. Reduce the deposits by transfers in from other accounts, and compare the total to the total of gross income and deposits from sales (plus taxes) charged to customers reported on your tax return.

If your deposits, net of transfers, total more than your gross income from other sources plus your receipts of receivables from invoicing (gross sales, plus taxes), it's likely a reconciliation needs to be done. This has nothing to do with expense claims, this is purely a reconciliation of the money deposited each year, compared to the income from all sources.

If you’re concerned that you don’t have proper records, or that your bookkeeper and/or tax preparer is making ‘errors’ in your tax return preparation, I have tools that might help. I have recorded a series of five webinars on keeping records that will help at http://www.taxdetective.ca/keeping_records_business.html.

© Eileen Reppenhagen, CGA, 2014
Certified ProAdvisor for both QuickBooks Desktop and Cloud (Online) 
www.taxdetective.ca 

Disclaimer: Please do NOT rely on or use the information in this article as a basis for a course of action without obtaining appropriate professional advice because the facts of your specific situation must be interpreted in light of the rules found in the Income Tax or Excise Tax Act. E.R.

If you have a personal tax question, write it down, keep it short, and submit it to the comments. Address your question to Dear TaxDetective. Eileen has kindly agreed to answer your questions in a Q&A column for writers in March. This is your opportunity to learn more about tax, and who knows, you may find a way to pay less tax!

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