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"Roundheads and Ramblings"

February 2013

Those All-Important Income Tax Deductions

The Internal Revenue Service has a soft spot for writers. Who would have guessed! Once you admit that you are an author by claiming that designation as your profession, the tax laws are on your side. Someone in Washington actually understands that book production takes a long time, and that you can work at it for years without making any profit, because you are still creating the book, not selling it. They will grant you your deductions for expenses for up to five years before they start refusing your claims to be a “real” writer. On your tax return, don’t list yourself as “store clerk” or “plumber’s assistant” while you are writing. There’s a special designation for writers; find it and use it. Oh, you should keep your day job, but think of yourself as a writer and regard “fry cook” as your hobby, not the other way around. Then start collecting your deductions.

Have you set up your home office? Then you have a place of business. Measure the space in square feet, determine the square footage of your entire house or apartment, and then figure out the percentage of the residence that is exclusively used for business. (A 10’ x 12’ office in a 1500 square foot house = 8% devoted to business use.) That percentage now applies to all of your housing expenses that affect the entire space—heating and lighting bills, rent or mortgage interest, insurance, homeowner association fees, security system, and termite protection are all common expenses. You can’t deduct painting the living room if you use the back bedroom as your office, but you can deduct 8% of the cost of a new roof, since that applies to the entire structure.

Next, take a look at your home office and its contents. If you are using an old card table and a folding chair for a desk, you probably can’t deduct their cost, but if you go out and purchase a new computer desk, using it only for your writing, its price will be deductible. New or fairly recent electronics (computer, printer, external backup drive) can be deducted or depreciated. The first phone line into your residence is not deductible, but if you add a second line for a fax machine or an 800 number for your business, you’ve found another deduction.

Be sure to keep track of all expenses for office supplies—pens, pencils notepads, printer cartridges, diskettes, scotch tape, paper clips, file folders, labels, a calendar, an appointment book, scissors, a rack to hold current file folders. You can even deduct the cost of air, if you buy it in compressed form and use it to clean your keyboard. (I use mine to chase the cat off the desk, but the principle is the same.)
Think advertising. Anything you have printed with the name of your company or the name of your next book can be deducted as an advertising expense. Of course you’ll have a supply of business cards, but you can also use the same size card to announce an upcoming book. (I just had some printed with a picture of “The Second Mouse” on them. I have a second set of half-size business cards with photographs of Beaufort, SC, on them to advertise my next novel, The Road to Frogmore.) Both were deductible, as are bookmarks that match your book covers or brochures telling dealers and bookstores how they can order your books.

Much of your book budget will go for travel—to research libraries, book signings or writing conferences. If you travel by car, you can deduct the exact mileage, so long as you keep a log or record of the odometer. You’ll be asked for details of the car’s purchase price, its year and model, its VIN, and its total mileage, so keep them handy. You’ll be able to deduct 50 to 55 cents a mile if your travel is purely for business. I bought a magnetic company sign for under $10.00. On business trips, I slap that on the front door of the family sedan and turn the entire trip into a business expense. You can also deduct hotel bills, parking fees, and bridge or road tolls if you keep records.

And finally, you’ll need to keep careful count of the books you order for resale. With a print-on-demand contract, you don’t have to keep a huge inventory on hand, but you’ll need a constant supply of printed books to give away, to send to book reviewers, to sell to your friends, to take with you to speaking engagements, or to enter into book contests. You may be asked to report your sales and to pay sales tax, so you’ll need to account for every copy you purchase. Be sure to check with your municipal and state laws on sales tax. In my state, you don’t have to report sales for tax purposes until your sales go over $3000.00, but that may not be so for where you live. The ones you sell will cost you a bit, but the ones you give away can be deducted.

For many authors, these expenses can mount up to a tax deduction of several thousand dollars. Just remember that you are expected to be earning a profit after five years of effort. If you are making money, you can only deduct expenses that exceed your income. If you are not making any money after five years, the IRS will tell you that writing is now just your hobby and deny any deductions. It will be time to declare your real occupation as fry cook or plumber’s helper.

Portions of the above blog have been  taken from my book, "The Second Mouse Gets the Cheese: How to Avoid the Traps of Self-Publishing," available from Amazon, Barnes and Noble, Apple iBooks, and Smashwords.com.

Creating a Home Office

Establishing your own business has tax advantages. Once you have a plan and a named business, you can declare it as a “sole proprietorship” on your income tax and start taking deductions for all those expenses. The biggest deduction will come from establishing your home office as your principle, regular, and exclusive place of business.

What does that mean? Well, basically, no more writing at one end of the dining room table and then shoving the papers out of the way to serve dinner. You must have a clearly defined space in which you conduct all the activities associated with your business—writing, researching, editing, advertising, shipping. It does not have to be a large space. You can fit an office into a large closet, a cubbyhole under the stairs, in the basement or the attic, or into a section of a room that is clearly separated from all other activities there. It simply must be used for your business and for nothing else. You’ll need a desk, a filing cabinet, and—most important—a place to keep everything separate from the other parts of your life.

I was fortunate to have my own space already designated. When we moved into our new condo, we had the builders convert what started out as an open den area into a third “bedroom” with a small closet. My husband had already claimed a smaller room as his place to work on all his Lions Club business. This new room was to be mine. It has evolved into a cozy hideaway that makes a perfect home office. My initial requirements were these: a door that closes, lots of natural light, phone and computer cable connections, and a few creature comforts. I furnished it first with bookcases and a large slab table to serve as a computer desk. And here’s what it holds at the moment. I’ve added risers at the back of the desk slab to lift frequently used office supplies, the printer, the cable modem, the backup drive, and other components off the main desk. Two low filing cabinets flank the desk to hold research files and other supplies while providing additional space to stack stuff. The closet is now full of industrial shelving to hold overflows of books, files, shipping supplies, and extra computer elements. An upholstered rocking chair and a floor lamp positioned between the accordion folding doors of the closet provide a hidden reading nook. A futon, full of pillows and a fuzzy throw, waits for the moment when I really need a quick nap.
The atmosphere is welcoming. The walls are painted a bright, energetic tangerine. A magnetic white board allows me to leave notes or pin up interesting pictures or publicity clippings. The large picture window opens onto a grove of cedars and cypress trees. The rocking chair sits on its own little oriental rug, and a modern lamp gently lights my desk area. On the walls are a few award plaques, my diplomas, and a huge etching of St. John’s College, Oxford, where I was lucky enough to teach for three separate summers. Scattered around the room are a few stuffed animals from special places—a bear from Gettysburg dressed as a Union soldier, another dressed as one of the palace guards from Buckingham palace, the ragged little puppy from Poogan’s Porch in Charleston, and the stately lion from the Biltmore estate.
Finally, there are the reminders of the purpose of this particular office. Sitting on the frame above the entry door is a cutout of a black cat, looking exactly like the Katzenhaus cat from my business cards. A brass Civil War cannon acts as a paperweight. The closet door sports a street sign that says “Frogmore” in honor of my latest book. (And no, I didn’t steal it; I bought it in a souvenir shop on St. Helena Island.)
The result is eclectic, but definitely my principle, regular, and exclusive place of business. When I’m here, I’m working. Even the cats have learned to respect the boundary of the doorway. They will wander in once in a while, but only to curl up quietly on the floor or the futon, thus keeping it Katzenhaus in fact as well as spirit.
Portions of the above blog have been  taken from my book, "The Second Mouse Gets the Cheese: How to Avoid the Traps of Self-Publishing," available from Amazon, Barnes and Noble, Apple iBooks, and Smashwords.com.

Creating Your Publishing Business

It’s one thing to decide you’ll self-publish your new book. It’s quite another to take all the steps necessary to become a publisher. Here’s the point you must understand: publishing a book starts long before the book is written. Publishing is a business, not an afterthought. So establishing a business was my first step.

A business needs a definition and a name. I started with the name, something I could use as a publishing imprint on my books. I didn’t want anything that would identify me too closely—not my name or a street address, nothing too cutesy, but something that would lend itself to a neat little logo. After coming up with several ideas, only to discover by way of a Google search that the name was already being used, I looked around the room where I was sitting and realized that all four of my cats were there keeping me company. My first thought was, “This is like living in a cat house.” Then, realizing the unfortunate connotations of that word, I switched to German, coming up with Katzenhaus Books and a simple black cat silhouette as a logo.

Next I asked myself what I wanted this business to do. The answer was fairly straightforward. Katzenhaus Books would produce, publish, promote, and sell one or more books of original historical fiction. It would remain flexible enough to expand into other book types. Perhaps eventually it would be able to offer similar services or advice to other writers who were seeking independent publishing choices.
Any business needs capital and a financial plan. During my academic career, I had relied on research grants to support the writing process, a publishing contract to pay production costs, and a publisher to bear the burdens of advertising and distribution. All I had to do was write. Now, all those expenses came back to me. I started my financial analysis by comparing several years of our living expenses against our income to discover how much discretionary income I had to play with. After deciding how much I could afford to risk on this venture, I did some research on self- publishing companies to estimate the total cost of a typical book. What I discovered was a wide range of offers, depending on how much help I was going to need.

UPDATE: To get an idea of what the various publishing services cost, check out this chart from Bibliocrunch. You'll see that they can easily run into thousands of dollars, but in terms of the resulting quality of your book, the investment can be extremely important.

The next step involved an honest examination of my own knowledge and abilities. I had easy access to most of the research materials I would be using, so I would not need to do a whole lot of initial travel. I’m a professional historian, a pretty good writer, and an experienced copy editor. Writing was not going to be a problem. Advertising and distribution remained question marks, but I had some experience in doing book signings and conference presentations. I was also an experienced webmaster. When it comes to book design, on the other hand, I’m pretty much out of my element. While I might have an idea or two about how I wanted a particular book to look, I was going to need someone to do the actual cover and interior layout. It appeared that I could afford to pay for some contracted design services and handle production costs out of the nest egg I had identified. Then I worked on establishing a book price that would make it possible to re-coup my expenditures.

My private resolve was to produce the book I was eager to write within the next two years. Then I needed to sell enough copies first to restore the savings account and then to accumulate enough of a cushion to finance any future book. I gave myself an estimated eighteen months to two years to accomplish that. If, at the end of four years, I had not made a profit, I would retire from the publishing business and take up knitting or crossword puzzles.

That left only two more things to be taken care of.  The first was easy.  On my next federal income tax form, I simply declared myself a "Sole Proprietor" business.  The form does no require "proof" of any kind beyond a few simple questions about the year you started the business, its name and category, and contact information.  That's it.  You've become a business owner.

Next I checked with my county clerk's office to see if I needed a business license.  I'm not offering legal advice, here, because your state may have different laws. I learned that I did not need a business license in Tennessee so long as I did not have sales that amounted to more than $3000.00. The amount does not  not include royalties, because you do not owe a sales tax on books that someone else sells. I did pay a $15.00 fee to register my business, but that was the extent of my responsibility.

Creating a business is really easy.  Don't fail to do so.

Portions of the above blog have been  taken from my book, "The Second Mouse Gets the Cheese: How to Avoid the Traps of Self-Publishing," available from Amazon, Barnes and Noble, Apple iBooks, and Smashwords.com.

Three Good Reasons To Think of Writing As a Business

We're going to be talking about business matters for the next several days.  My comments will be addressed primarily to those who are indie writers, but even if you have a traditional publisher, you must start thinking in business terms.  Here's why.

Legal Credibility:
  • If you think of your writing as a business, you are less likely to find yourself involved in legal technicalities. You'll be dealing with contracts all along the way, whether with a traditional publisher or with separate individuals who offer publishing services for hire.  "New Press" seems more trustworthy and more likely to pay its bills than "Susie Newwriter." 
  • If you use one of the book production firms, they will offer you the option of listing your company as the publisher of record.  if you don't have one, they'll add their own imprint, and all too many people see a book published  by "CreateSpace"  or "Lightning Source" as a mark of inferiority.
  • Letting the printer put their own imprint on your book could cause copyright problems and control issues  down the road.
  • And if your book turns out to be a bestseller, someone may want to turn it into a film. In that case, you may find yourself in need of legal standing in order to negotiate your rights.

Financial Benefits:
  • Businesses are able to claim all sorts of deductions for their expenses.  If you have not formally declared yourself a business, writing is just your hobby, from which you happen to draw a little income.  And hobby expenses are not deductible.  We'll look at the details of deductions later in the week.
  • Further, if your hobby proves makes a little money, you may be required to pay a self-employment tax on the income, and that tax rate is extremely high.  Without legitimate deductions to balance the income, your "hobby" may well cost you much more than it brings in.
  • Businesses can also purchase their own ISBN numbers for their books, and business ISBNs are about five times cheaper than the one you get by allowing a book production company to provide one. 
  • In addition, an ISBN number identifies your publisher to people like bookstore owners, which brings us back again to the issue of legal credibility.
  • Advertising a book with a publishing imprint is more acceptable and more successful than just pleading with your friends to buy your book.

Motivational Advantages:
  • If you allow yourself and those around you to think of your writing as just "something you do in your spare time," it's going to take a back seat to everything else in your life. If it's your business, you are much more likely to devote regular hours to doing it.
  • Keeping careful business records of your income and expenses provides you with daily motivation to keep the bottom line in the black.
  • The very idea that you have a real business will encourage you to do other business-like things, such as creating a logo and branding yourself on social media sites.
  • Almost by definition, a publisher puts out more than one book.  If you think of yourself as a publishing company, you are much more likely to continue to write and put out other books.

Just this past weekend I ran into a couple of writers who seem to be destined to become one-book authors because they have failed to make this transition to a business model. One kept denying that he ever intended to make any money with his book; he just wanted someone to read it. Without any other goal, he's not headed anywhere.  The other protested that she had no time to write because she was promoting her first book. That's rather like a factory owner locking the door to the factory in order to concentrate on selling the first production run.  What happens down the road?  Nothing!


The Many Roads to Publication

Now let's take a look at all the publishing options and see how they compare.
1. Traditional Big-6 Publisher (Hachette, HarperCollins, Macmillan, Penguin, Random House, Simon&Schuster):
  • Yes, they will lend great prestige to your book, and they will do the heavy lifting of editing, design, promotion, and distribution.
  • But, you will lose most of your control over the book, and their royalties tend to be very low in order to support all their services.  In addition, you first need to have an agent, and you can expect them to be extremely selective in what books they publish.  They will always support an already-contracted author before someone whose work is untested.

2. Small Publisher:
  • Yes, there are thousands of them in competition, and most will be willing to read your manuscript without an agent.  They also tend to be quite supportive of their authors.
  • But, they have only limited funds, and sometimes limited knowledge of the publishing business. Quality can be "iffy." You will have to do most of your own promotion and selling.

Vanity Press:
  • Yes, they may offer help with editing and layout, and they probably will not turn you down, no matter how bad the book really is.
  • But their pricing is often out of line, and they will require you to buy the whole print run and then distribute and sell the books on your own.  How big is your garage?  Can you sell 5000 copies to your friends? You do NOT want to do this!

4. Print-on-Demand (POD):
  • Yes, they, too, will not reject you, and their books are usually of fairly high quality.  Plus, you do not have to buy any books before they are sold.
  • But they, too, carry a high price tag, and book stores will not take a chance on their books because unsold copies cannot be returned.  Authors who go with some POD companies fail to sell a single copy.

5. Do-It-Yourself:
  • Yes, this method gives you total control over your book because you are solely responsible for EVERYTHING! You also get to keep all of the profits..
  • But, how much do you know about editing, cover design, page layout, bookbinding, marketing, and distribution channels? Poor-quality books do not sell, no matter how good the content may be.

Independent Book Producers (CreateSpace or LightningSource):
  • Yes, these two companies are reliable, fast, accurate, and helpful.  They succeed because CreateSpace works with Amazon, while LightningSource is a subsidiary of Ingram, the largest book distribution company. If you can do the preparatory work yourself, they will print, bind, and distribute your book at no cost to you. They also offer complete publishing services, from editing to advertising if you need help, although these services come at high cost.
  • But while their royalty rates are quite high, up to 75-80% if they sell your book out of their own online store or as an ebook, their sales at regular brick-and-mortar bookstores are dismal because books are not returnable (the old POD curse). And if a store does manage to sell one of your books, you'll need a magnifying glass to find the royalty.  CreateSpace just sold a copy of my $17.95 "The Road to Frogmore" through a bookstore order, and my share came to $0.18 -- yep, that's 1%!

7. Ebook Publishing:
  • Yes, there are a lot of advantages to this style.  Ebooks sell well these days, and although their prices are low, they make up for that in volume.  By selling only ebooks, you completely avoid the costs and headaches of production and distribution.  It's also easy. Amazon will walk you through the Kindle conversion and Smashwords.com provides complete instructions on how to format  your computer file to suit all the other ebook channels (Apple, B&N Nook, Sony, Kob, etc.) Even if you need formatting help, you can hire it for well under $100 a book.
  • But, there are people out there, still, who want to hold a book in their hands.  You may be one of them; authors often need the satisfaction of holding their books in their own hands. And bookstores are not dead yet.  Can you hold a book-signing or a launch party for something that only exists in the ether? Putting your book out only as an ebook keeps many people, including reviewers, from fully appreciating it.

There you have the choices. My choice was  a combination of #6 and #7.  I have used CreateSpace to produce my last four books and have been entirely satisfied with the results. They have also handled my ebooks on Kindle.  For the other sales channels, I turned to Smashwords, and as a result, Barnes and Noble now sells almost as many of my ebooks as Amazon does. Of course, as an indie writer, i still had a lot of work that only I could do.  So next week we'll talk about how and why independent  authors need to think of themselves as a business.

ADDENDUM: Today I ran across a publishing column by Penny C. Sansevieri in which she took up the fight to make independent publishing a norm rather than an afterthought.  She ended with this challenge:

Welcome to the revolution. If you're just showing up to the battle we welcome you, if you've been here for a while we're grateful that you're still here and for those of you still uncertain, still thinking that you'll wait it out and see if you can get a big name interested I wish you all the best. Just remember, while patience is a virtue there's nothing in the world like seeing your work in print, your words on a page bound and ready to find readers. And ask yourself: are you waiting because you really want a big name behind your book? Or are you waiting because you're not sure your book is good enough? There's only one way to find out.