If you’re searching for a way to deduct the cost of your next vacation, here is a case that provides some guidance on what not to do.
Michael Oros was a full-time employee of Intel Corp. Before 2006, Oros had no experience writing or publishing books. That year, however, he completed a business plan to write and self-publish a book about his upcoming worldwide trip. Although not professionally trained, Oros, an experienced photographer, intended to use the photographs he took during his trip as a focal point of his book.
In November 2006, Oros began a four-month trip, visiting South America, Asia, Africa and Australia. While in South America in November and December, Oros took thousands of photographs of businesses, temples, monuments, natural wonders and wildlife, and he maintained a contemporaneous journal in which he wrote about his experiences. Throughout the trip, Oros was on either a paid vacation or a paid sabbatical from Intel.
As of March 2011 – more than four years after completing the trip – Oros had not published or completed his book.
Oros attached a Schedule C, Profit or Loss From Business, to his 2006 federal income tax return. It listed his principal business as “book author.”
He reported no business gross receipts or income and claimed travel, meal and telephone expenses for a total loss of $19,140. The IRS disallowed his travel and meal expenses. At his Tax Court trial, Oros introduced receipts and credit card statements for expenses incurred on his 2006 trip.
The Tax Court found that, although certain facts such as the business plan suggested that Oros was engaged in a trade or business, Oros failed to establish that his writing activities qualified as a trade or business under the tax law. Notably, he:
- Did not present any evidence of continuous or repeated activity as an author
- Had not yet completed the travel book or any other book
- Was a full-time employee of Intel during 2006
- Did not adequately show intent to engage in and continue in the writing field “with substantial regularity and with the purpose of producing income and a livelihood.”
The Court of Appeals for the Ninth Circuit has now upheld the Tax Court’s determination. Oros failed to demonstrate his entitlement to travel-related business deductions (Michael S. Oros v. Commissioner, 9th Circuit Court of Appeals, Dec. 17, 2013).
If you have plans to write the “great American novel,” keep in mind that courts determine whether a person is engaged in a trade or business by using a facts-and-circumstances test. The test focuses on three factors: whether you undertook the activity intending to earn a profit, whether you are regularly and actively involved in the activity and whether your activity has actually begun.
To prove regular and active involvement in a trade or business, you must show extensive business activity over a substantial period as opposed to a one-time venture or investment. Writing can qualify as a trade or business even if it is not your sole activity, but you must have some conscientious intent to engage in and continue in the writing field to produce income and a livelihood.
In other words, if you say you’re a writer, you have to write!
“Income tax returns are the most imaginative fiction being written today.” – Herman Wouk