You ask, we answer: Taking a loss — can I?
Susan writes, “Here’s a question that I’m sure many writers have faced. If a magazine folds and they still owe you money, what should you do? In my situation, I had been gently nudging an editor for payment for several weeks when she finally told me she was wrapping up the last issue and struggling to balance the books. Can I write off the lost check on my tax return even if I don’t aggressively pursue payment from the publication? Thanks.”
Ouch! I hate it when that happens. My sympathies, Susan.
Unfortunately, you can’t take this as a loss on your tax return, even if you do aggressively pursue payment — I’m not sure why, but we’ve discussed this on another writers’ board with a CPA. Anyone here have a better answer?
If it were me, I’d talk to the editor. Is she declaring bankruptcy or just ceasing publication? If it’s a lot of money and they’re not filing for bankruptcy, you could work out a playment plan, send them collections, or file a small claims suit. If they’re declaring bankruptcy, you can pretty much kiss your money good-bye.
Any other suggestions for Susan? Add them to the comments section. If you have more questions for the Renegades, send them to questions [at] therenegadewriter [dot] com. [db]
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May 30, 2007 Magazines, You Ask, We Answer
My understanding from my CPA is that businesses can account for income in two different ways:
1. Cash basis. The money you earn becomes income, and income tax is due on it, when you receive the check.
2. Accrual basis. The money you earn becomes income, and income tax is due on it, when you do the work, irrespective of when/if you get paid.
Most small businesses — or at least those that aren’t incorporated — and especially those who have long lead times between doing the work and receiving payment, prefer to account for their income on the cash basis. This makes sense; why pay income tax to the IRS for money you haven’t collected yet? On the flip side, if you haven’t paid tax on the income yet, you can’t write off the loss if you’re not paid. From the IRS’s standpoint, this makes sense, too: why should they give you a tax credit for taxes they never got? So, if you account for revenue on a cash basis, you can’t write off the loss from a non-paying client. If you account for your revenue on an accrual basis, on the other hand, you probably can write off the loss once you’ve made a good faith effort to collect the debt.
I’m not an accountant, so I’d advise checking with a CPA before treating the above as gospel, but that’s how my accountant explained it to me.
– Tammy
Thanks for the info, Tammy! That’s very helpful.
Wow, great response Tammy. Very informative. Maybe you should be a CPA!