Sunday, December 03, 2006

When Yog’s Law Meets Tax Law

Yog’s Law states that money always flows towards the writer. Many have taken this to mean that the only place that an author should sign a check is on the back, when they endorse it. That’s fine and dandy, if you are the kind of person that likes to sit around and wait for checks to arrive in the mail. However, even those who have taken this skill to the next level will eventually find themselves in need of an accountant. But accountants cost money. If you follow Yog’s Law to the letter, then you will quickly find yourself in a conundrum.

All foolishness aside, one of the most consistent messages that I read on the internet is that publishing is a business. If you are going to self-publish, you need to remember that. You are going into business for yourself. Sooner or later, you will discover the need for bookkeeping – that is, keeping track of your money.

You see, business is all about the bottom line – how much money do you have? Money comes in and money goes out. Vendors have to be paid and sales have to be kept track of. Otherwise, how will you know if you made any profit?

The most important thing that every self-published author should have from day one is a spreadsheet that keeps track of your expenditures. Everything that you have spent money on in preparation for the publication of your book is fair game. Did you pay an editor to look at your manuscript? Did you hire a graphic designer to build a website, cover and fliers for you? Did you send out review copies? Did you pay a lawyer to look over your contract? Did you print business cards? Did you go to trade shows?

Everything that you paid out goes in the category of losses. Everything that you earned from the sales of your book goes in the category of gains. The difference between the two becomes your profit/loss statement. Chances are that you will be able to show a loss for the year. This is not necessarily a bad thing.

I have a friend who runs a small entertainment law practice out of his basement, in addition to his day job as General Counsel of a moderately sized IT firm. He told me once that his private practice has not made a profit once in seven years. These things happen.

The important thing to remember is that if you are keeping track of your profit and loss, you can report all of that on your taxes at the end of the year. A financial loss for your small business does not have to be catastrophic. In fact, it can be a good thing. For one, you are allowed to deduct the value of your loss from amount of money that you earned, which means you are paying less in taxes.*

The reduction in taxes means that Yog’s Law has been satisfied. The money flowed towards the author, even if it was from an unexpected source. And that bit about not spending money? We’ve all got choices to make.

*This is standard business practice, by the way. A number of years ago, I read a piece of commentary which pointed out that it’s good policy for Hollywood studios to put out crappy pieces of underperforming material because they serve as net losses that can be balanced against overperforming blockbusters. Less profit equals less taxes.

I’ve never seen anything to indicate that publishing houses do the same thing, but I am almost cynical enough to believe it.