You just returned from the WRWA Fall Conference in Janesville. You spent money for registration, hotel, meals, mileage, and four books that promise to advance your writing career. What can you deduct as a legitimate business expense? To answer that question you have to understand the tax obligations of your particular business entity. Most writers are doing business as sole proprietors, earning a little income here and there with book sales, non-fiction features, short stories, and a few bucks from poetry contests. If you show those earnings as income, you should be able to take legitimate business deductions.

The real question is whether you see your writing as a business or as a way to pass the time, like a hobby? If you actually make income from your writing, and if that income exceeds the expenses you have (or report), then you have every right to take your expenses as tax deductions. There's no magic income minimum, but to take business deductions against income, you eventually have to show a profit or some rookie from the IRS is going to call you for a personal interview. If you have writing-related expenses this year, but no writing-related income, and anticipate income next year (for example, from sales of a book that is coming out next year), you can defer those expenses and take them in the following year.

You can deduct the full value of almost everything you spend to advance your earning potential as a writer. Meals away from home and entertainment expenses are the exception. Both are only 50% deductible. If you entertained an agent or publisher, keep track of whom you were with, the business purpose, where you were, date and amount. Attending a writers' conference or seminar, motel and hotel expenses are 100% deductible-all the more reason to book with a facility that offers a continental breakfast. For use of your automobile on business, you're allowed 44.5 cents a mile this year (2006). Effective January 1, 2007, the business mileage deduction will increase to 48.5 cent a mile.

You can also deduct the cost of business telephone calls. Simply circle the business-related calls on your monthly bills, total them and keep a copy in your business records. At the end of the year tally the 12 months and deduct the cost of those calls. Fees and taxes on the home phone are not deductible. If you do a lot of business on the phone, the best idea is to install a line or get a cell phone for business only. Then 100% of the telephone charges, including all those miscellaneous fees and taxes, are deductible.

Other tax deductible items include magazine subscriptions, dues for business affiliations, postage, computer costs, facsimile and copy machine and their maintenance, photographs and camera used for business, the cost of a Website and Internet connections.

If you're self-employed and paying your own health insurance premiums, that cost may be deductible on Form 1040, but not as a business expense. Moreover, the deduction cannot be more than your business' net profit. It's not allowed if you are covered under other health care plans like that of an employed spouse.

Even though you're not taking a home office deduction, all the supplies necessary to conduct your writing business are deductible. You can deduct the cost of office furniture all in one year or spread it over a period of seven years. That's known as depreciation expense. The IRS has a chart for depreciating items like desks, filing cabinets, and computers, which is another reason to seek the help of an accountant who stays on top of changing tax laws. Their cost is deductible.

One of the more controversial tax deductions is the home office. The IRS says it must be space devoted exclusively to your business. If that's the case, and you're using 600 square feet of a residence that's 2400 square feet, for example, you should be able to deduct one-fourth of your rent or mortgage payments, the annual insurance, heating, and electrical costs. However, if your kids are on that same computer you use during the day, and the office is a family room for watching the Packer games on evenings and weekends, you better think twice about using it as a deduction.

To allay fears of an IRS audit, good record keeping is essential. Unfortunately, writers are generally lousy record keepers. For my own use, I composed a form called an Itinerary and Expense Sheet. I use one for each week. It has a space to show my mileage in and out each day with a line or two for a description of the trip and a space for expenses. Receipts are stapled to each sheet. From these weekly Itinerary and Expense Sheets my company reimburses me for expenses each month.

You've heard the expression: An emergency properly prepared for never happens. That's exactly how to handle your expense and income records.

Anticipate that you will get a call from someone at the Internal Revenue Department; and hope it never happens. But just in case, have those records ready.

To reduce the possibility of an IRS audit, you should establish a business entity. It really is not difficult to establish, depending on what option you choose. You have the choice of doing business as a proprietorship, a partnership, an LLC (limited liability corporation), or an S or C corporation. Social Security payments and some deductibles are handled differently depending upon the entity you choose.

Most writers do business as proprietorships or partnerships. When you're self-employed as a proprietorship, you have to pay double the Social Security contributions you would pay as an employee of a company. It's often referred to as a self-employment tax, which is currently 15.3%. That doesn't seem fair does it? The good news it that you can deduct half that amount on your 1040 federal tax return.

Operating your business as a sole proprietor requires only an address, phone number, and e-mail address. If you establish a partnership (with your wife, for example), you can employ your children and not be subject to Social Security taxes for them, provided they are under the age of 17. The child must perform services for the company and be compensated accordingly. What you pay them is a deduction for the business. If the child's total income is under the standard deduction ($5,150. for 2006) no federal income tax is due.

There is no requirement for you to obtain an Employee Identification Number (EIN-Form SS-4, see http://www.irs.gov/pub/irs-pdf/fss4.pdf?portlet=3) so long as you operate your business as sole proprietor and have no employees. Doing so, however, firmly establishes your writing enterprise as a business and eliminates the need for you to give your Social Security Number (SSN) to everyone who pays you for work. You can give them the EIN instead, thus reducing the risk of identity theft.

A partnership does require an EIN, and unless you're partnering with your wife, whom you trust dearly, I would recommend a partnership agreement, one prepared by legal council.

Another option in Wisconsin is to form a limited liability corporation (known as an LLC). The filing costs just $135 (www.wdfi.org), which can be taken as a business expense. An LLC limits your personal liability for losses and damages caused by you or your employees and agents. There's less paperwork-annual reports and such-with an LLC than with an S or C corporation. With an LLC or corporation you must apply for an EIN from the federal government. When a publisher asks for your social security number, you give them your EIN instead.

As an LLC or an S or C corporation, the company pays one-half the Social Security tax and you pay the other half in your wage deductions. If you are the only shareholder, you can see that both halves are still coming out of your pocket. If you're the only employee, this means a lot more paperwork for you compared to being a sole proprietor or a one person LLC. In addition, S and C corporations are liable for unemployment taxes. On the other hand, if you're doing business as an S or C corporation, the corporation is not relieved of the child's Social Security tax. It's generally not the way to go as a writer.

If you are earning income from your writing, you should seriously examine the value of taking writing-related tax deductions and the benefits of establishing a formal business identity. Other than S or C corporations, it's pretty easy-something you can do yourself, without the help of a lawyer. But tax laws change; so you should always get advice from a good tax accountant. That's deductable, too, by the way.

[Editor's Note: This article is based on information in Chapter 28 (Income and Expenses) in John Campbell's book, Writing in Retirement (www.writingretirement.com), which covers the subject in greater depth. Copies may be purchased from John at