FAQ- Can the expenses incurred while a book is being written be deducted from the royalties from that book?
Author: SAIT Technical
Q: The taxpayer worked on a book from 2011 until 2013 and received the first royalties in 2014. Can the expenses incurred before the royalties were received be deducted from taxable income?
A: We submit that the answer lies in the definition of trade in section 1 of the Income Tax Act. The relevant part is that a ‘trade’ includes “… the use of or the grant of permission to use … any copyright as defined in the Copyright Act or any other property which is of a similar nature…”
The trade therefore commences when the permission to use is granted and that implies, in our view, that the expenses incurred prior to the granting of the tight to use (not receipt of the royalties) will be pre-trade expenses and at best will be deducted in terms of section 11A. That of course implies that they are “any expenditure and losses—
(a) Actually incurred by that person prior to the commencement of and in preparation for carrying on that trade;
(b) Which would have been allowed as a deduction in terms of section 11 (other than section 11 (x)), 11B, 11D or 24J, had the expenditure or losses been incurred after that person commenced carrying on that trade.
Disclaimer: Nothing in this query and answer should be construed as constituting tax advice or a tax opinion. An expert should be consulted for advice based on the facts and circumstances of each transaction/case. Even though great care has been taken to ensure the accuracy of the answer, SAIT do not accept any responsibility for consequences of decisions taken based on this query and answer. It remains your own responsibility to consult the relevant primary resources when taking a decision.