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Writing is Taxing

 


And the Winner
Is …

Authors routinely give away copies of their books as prizes, and may even give away big-ticket items such as an e-reader as a means of drawing attention to their website or promoting the release of a new book or series. Be sure to properly report the prizes you award and to take the proper deductions so you don’t get in trouble with Uncle Sam.

Reporting a Prize. If you award prizes totaling $600 or more to a single recipient in a given tax year, you must report the prizes on a 1099-MISC at the end of the tax year. Report the prize in Box 3 “Other Income.”

You will be required to include the winner’s name, address, and taxpayer identification number (social security number) on the 1099 form. Failure to report the winner’s tax ID number can subject you to penalties. Therefore, it is critical that you obtain the taxpayer’s tax ID number prior to delivering the prize.

In fact, if you are running a contest with a prize valued at $600 or more, I would suggest that you make it an express requirement that the winner provide a properly completed W-9 before the prize will be awarded.

Request the taxpayer’s tax identification number by asking them to complete a W-9 form. You will note that by signing the W-9 form, the taxpayer asserts under penalty of perjury that the information contained therein is correct. Thus, by obtaining the properly completed W-9 form, you have protected yourself from liability if the tax ID contained therein is incorrect. It is not sufficient for the prize winner to simply provide the tax ID number to you via email, phone, or another form of communication. You will not be protected if you obtain the tax ID number via this type of informal communication. You can obtain a W-9 form at this link: http://www.irs.gov/pub/irs-pdf/fw9.pdf

Amount of Deduction. Prizes are deductible in the amount that you paid for the prize that is awarded. For instance, if you paid $249 for an e-reader that you give away as a prize, your deduction would be $249.

Even though intangible prizes such as a personal autograph added to a book, the right to name a character in a novel, or the right to have lunch with an author have value, the IRS allows no deduction for these prizes because you have not paid any money out of pocket for these items. You are only allowed to deduct the actual out-of-pocket cost for the prizes.

Prizes vs. Gifts. Keep in mind that gifts are not prizes. A gift is given to a recipient of your choosing that is not made pursuant to a contest. A gift is something you give to a business associate that is intended for their personal use, either now or in the future. Your deduction for business gifts is limited to $25 per recipient per year. For example, if you send your editor and/or agent a basket of fruit or chocolate after a contract negotiation has been completed, the gift would be considered a business gift and would be subject to the $25 deduction limitation.

Gifts do not include items that cost $4 or less on which your name is clearly and permanently imprinted and that you intend to widely distribute (i.e. pens, magnets, coasters, etc.). Your deduction for these items is not limited, no matter how many you may give to a business associate.

In addition, if you donate a prize to a charity and the charity then auctions off or awards the prize, the charity is treated as the party awarding the prize, not you. Thus, you would have no requirement to report the award of the prize, even if the prize is valued at $600 or more. You would be entitled to take a business expense deduction for the cost of the prize donated if you derive a business benefit in return for the prize, such as promotion of you and your books on the charity’s website, in a program, or at       Continued on page 17   

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