I am getting ready to publish a non-fiction book this fall. To do research for the book I had to buy various informational books which I plan to expense against royalties that my book generates.
Can I deduct the cost of books purchased in prior years? I have been researching the book for several years, so in many cases my costs have been incurred in previous years.
No, you capitalize all that and deduct as depreciation from the royalties.
What it means is that you cannot deduct the expense when it is incurred, but only when you started receiving income that the expense was used to derive. This is similar to capitalizing building improvements which can only be deducted when you start getting rent, or capitalizing software development expenses which can only be deducted once you start selling/licensing the developed software. In the case of book writing - you capitalize the expenses and deduct them once you start receiving royalties.
The period over which you deduct (the "depreciation schedule") depends on the type of the expense and the type of the income, so you better get a guidance from a licensed tax accountant (EA or CPA licensed in your State).
I have done several days of additional research on this and found out that it appears I can deduct the cost of the books against a single year's royalty income by claiming a Section 179 deduction. The steps are as follows:
(1) Write the maximum amount of property you can claim under section 179 on line 1 of Form 4562.
(2) Add up the total cost of section 179 property you began using during the tax year, including books, and record the amount on line 2.
(3) Write the limit of your deductions on line 3.
(4) Subtract the amount on line 2 from the amount on line 3 and record it on line 4. If line 3 is larger than line 2, simply write "0" on line 4, then subtract the amount on line 4 from the amount on line 1 and record on line 5. Step 5
(5) Describe the property and books on line 6 and record the cost of each in section b. Write the amount of the expense you are claiming for each item in section c of line 6. You can claim the entire cost of the books.
(6) Add the amount in line 6 c to any amounts on line 7 and write the total on line 8. Write either the amount on line 8 or the amount on 5 on line 9, depending on which is smaller.
(7) Write the amount of your Schedule C income on line 11, unless it is greater than $500,000. On line 12, write the amount of your deduction, which is the total of line 9 plus any carry-over you may have had from the previous year.
(8) Record the amount of your deduction for section 179 books and property on line 13 of your Schedule C, not line 22. Include form 4562 when you hand in your tax return.
source: "How to Deduct Books for Self-Employed" by Emily Weller
