Thursday, February 25, 2010

The Tax Club Investigates: The Taxes of Blogging, (while Blogging on Taxes)

           I'm excited to announce our first ever guest blogger.  Today we have a blog post from the fine folks over at The Tax Club.  They have a great blog as well called The Tax Club Report.  We look forward to other guest blogging opportunities from them. 

             As we begin to rely more on the World Wide Web for our every day needs, entrepreneurs are learning different ways to use the internet to generate income.  Sure, the “Dot Com” era might be something for the business section of the news, but not everyone needs the Wall Street Journal or a high-tech understanding of computers to learn how to make a dime. For example, a lot of people have taken up something that’s as old-fashioned as apple pie and book clubs: sharing hobbies!
            Whether it’s knitting, cooking, or fixing houses, the best way to share your special talent with an international crowd is to start a weblog, or a blog.  This term is often used by the media to describe political weblogs, but any kind of online journal can be a blog. It’s likely that even a few of our readers have blogs of their own. Usually, a blogger makes income by letting third parties advertise on their website. If the blog was created as a platform to share your thoughts on some relevant issues and not to generate a profit, anything made should be filed under the “hobby” section of the tax return.  
Expenses of a hobby can be deducted, but only up to the amount of your hobby income.  The expenses are treated as a miscellaneous tax deduction on Schedule A of your tax return, limited by the 2% of Adjusted Gross Income threshold, so not every hobby will get the deduction.  If the income becomes significant and more time and effort is expended to generate a profit from the blog, then the blogger might be able to treat it as a business, which means some of their expenses can be deducted directly against the income. That’s great news for people who put a large sum of money into their blogs yearly.
            So how does one cross over and become a blogger with a business? For the IRS not to think you’re just trying to claim some deductions off your hobby, you have to become a pretty serious blogger. In determining whether you have a business or a hobby, the Internal Revenue Service and the courts rely heavily on the following factors:
(1) the manner in which the taxpayer carries on the activity; (2) the expertise of the taxpayer or his advisers; (3) the time and effort expended by the taxpayer in carrying on the activity; (4) the expectation that the assets used in the activity may appreciate in value; (5) the success of the taxpayer in carrying on similar or dissimilar activities; (6) the taxpayer's history of income or losses with respect to the activity; (7) the amount of occasional profits, if any, which are earned; (8) the financial status of the taxpayer; and (9) elements of personal pleasure or recreation involved. The preceding factors, although not all inclusive, should guide you, so that your business activities are seen as professional and well planned.  If you cannot meet these factors, there is a “backdoor” way to prove that your activity is a for-profit activity by showing that the activity made a profit in at least three of the last five tax years, including the current year. 
To have the activity treated as a business, rather than a hobby, you need to approach the activity in a professional and serious manner.  You should be able to show that you put time and effort into your blog and you have a dynamic business plan that changes to make your activity more lucrative on a regular basis. You also shouldn’t be teaching people beginner’s knitting when you yourself haven’t reached intermediate; the IRS will be looking for a higher level of expertise. But as long as you are accomplished, you needn’t have your M.B. in Knitting Sciences; there are a lot of people out there who maintain informative blogs for income whose skills were self-taught.
            Once you’ve made sure you’re almost at the point where your hobby is no longer just fun, and you are generating enough income, you can start examining your expenses. The IRS says that anything you use that is “necessary and ordinary” is deductible, and for many of the crafts I mentioned, there are certainly some very necessary items that are used. To start with, all of them would need a website, so hosting the website itself can be deductible. On top of that, anyone knitting, cooking, or fixing houses would probably take photos, both to illustrate the exact motions or actions for old readers, and to attract new ones (everyone loves photos). Thus, a new digital camera for your blog could be deducted.  Once you get down to your hobby-specific items, you need to remember that only what is necessary is deductible. This means that if you are knitting, the yarn for the first Blue Cabled Alpaca Scarf will definitely be deductible, but the three you made for your nephews’ birthdays will not. If you are fixing houses, you can justify showing your readers how to replace roof shingles once, but you can only deduct the expenses that one time.
            If all these rules seem overwhelming, then don’t be dismayed! You can still just keep a blog as a hobby, report your income as miscellaneous income and deduct the expenses limited to the income received from this activity on Schedule A. You can sleep sound at night knowing the IRS won’t be interested in your website (unless you have photos— as we said, everyone loves photos). But if this sounds like just a step away from what you’re already doing, consider filing your appropriate blog expenses under Schedule C this year and give yourself a pat on the back— congratulations! You’re a business owner!

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