I’ll start with an apology to the greatest readers a guy could have. This isn’t going to be about baseball, and it isn’t going to be applicable to most of my regular readers. This is for the other bloggers out there. We’ll get back to our irregularly scheduled baseball coverage in our next entry…..
Bloggers, I really wish someone had told me seven years ago what I’m about to tell you.
Last Saturday, at the Twins bloggers gathering, the question was raised about whether or not bloggers can deduct certain costs from their taxes. The answer is ‘yes’, and the further answer is that this can be worth hundreds of dollars. But first, let’s get the disclaimer out of the way….
I am not a tax advisor. You should not mistake what I’m saying for advice from a tax advisor. This is general information only, and for specifics about everything I am about to tell you, you’re going to want to talk to an actual tax advisor. In fact, most of what you’re going to hear here can be gleaned from spending about 45 minutes with a tax advisor. So you might want to do that if you have any questions.
The Strategy
You can deduct expenses related to your business, and if your business is blogging, then you can deduct those expenses. You can do this even if you aren’t actually making any money from blogging, provided it’s a “business”. This deduction applies to both your federal and state taxes.
For example, let’s say you find $2500 of expenses related to your business. (We’ll get to where you are finding those expenses in a second). And say you pay 28% federal tax and 6% state tax which means your paying about 34% in taxes. And say you also make all of $100 in income from ads on your blog and the occasional freelance writing gig.
Your business has lost $2400 this year. You can write that amount off, so you have $2400 less taxable income. Which means you don’t need to pay a 34% tax on that $2400, meaning you pay $816 less in taxes. And, since most of us have taxes already withheld from our paychecks, you’ll get back an extra $816 back in your tax refund. That’s how you make several hundred dollars from blogging.
By the way, the specifics of the above example might not be dead-on accurate. That’s because I’m not a tax advisor. I constructed it as a general example of how reducing the amount of taxes you need to pay can end up getting you extra money. You’ll want to talk to a tax advisor for specifics.
Making Blogging your Business
Blogging is your business if you are in it for a long-term profit. Otherwise, it’s a hobby. If it’s a hobby, you can still deduct some expenses, but you can’t deduct any expenses beyond the income you make. So in the example above, you would only be able to deduct $100 (because that was the only income you had), and you would only make back $34. You want your writing/blogging to be a business.
And, if you’ve been doing this for any length of time, it probably is, even if you haven’t been recognizing that. So it’s time to treat blogging, and the expenses associated with it, like you would if it was a business. So:
- Record your business expenses in a timely manner – This is THE MOST IMPORTANT part, so we’ll cover it more below.
- Have a plan to make a profit long-term. For instance, write up a plan that states how you’re going to build an audience on your blog, how you are going to try and use google ads to raise revenue, use your blog and audience as a marketing tool to draw freelance writing gigs, etc.
- You may want to register your business with your state. If it’s located in the state of MN, you can do so by filling out a form on this web site and paying $35. Name it whatever you like, such as Lastname Publishing or Lastname Media.
- Document instances where you tried to market your business, like times you tried to get paying jobs as a writer, or attempts to get ads on your site. You need to be able to show that you are actually trying to make money.
Again, it’s not important that you end up turning a profit, though if you end up doing so, you’re really in good shape. If you make money two out of seven years, the IRS can’t say you’re a hobby. But even if you lose money for twenty straight years, if you run your business like a business, you can be safe.
How safe? I don’t know. You might want to ask a tax advisor. Which I am not. I’m just trying to pass along some general information here.
Identifying Expenses
A lot of things can be counted as business expenses for your publishing company. The important part is the documentation (which I’ll get to in a minute). For example, as a baseball blogger you could deduct:
- Tickets to a game. And food at the game, for that matter.
- A portion of your cable TV bill. - If you can claim that you wouldn’t have cable TV at all without your blog, then you can write it all off. Or, if you estimate that 50% of your viewing on cable is sports for your baseball blog, you can write off 50% of your monthly cable bill.
- A portion of your hi-speed internet connection bill. - Again, if you can claim that you wouldn’t have hi-speed connection without your blog, then you can write it all off. Or, if you estimate that 75% of your internet use is because of your blog, you can write off 75% of your internet bill.
- Computer/laptop – Are you getting it for your business? If so, it’s mostly deductible.
- Baseball publications – The books you read about baseball.
- Baseball subscriptions – The ESPN Insider or Baseball Prospectus subscription you have.
- Cell phone – Maybe. You could conceivably deduct the portion of it that is related to your blogging. Or, if you also have a land line and you use the cell phone as your business phone, you could do the whole thing.
- Mileage – Going to the game? In 2009, you can deduct $0.55 per mile for the trip you make. In 2008, I think it was $0.505 per mile.
- Parking – For the game
- Entertainment – If you attended the blogger get-together, you can deduct that. Watching a game at a bar with friends and writing about it, or using it for research? You can deduct that, too.
- Web site costs, URL registration costs, etc. - That $35 cost you paid to register your domain name and the other $35 you paid to register your business is tax deductible.
There is one thing you probably don’t want to try and deduct. On Saturday, someone asked if space in your home that is used for the business is deductible. The answer I got is that you probably don’t want to do that. The IRS is pretty sensitive about it, and has really tightened their interpretation of it. For instance, the space must be solely and exclusively used for the business, like a separate room. And even then, there are some factors when you sell your house that you need to consider.
Again, like everything in this story, you’ll want to consult a registered tax advisor for the full story. Because – and I don’t know if I’ve mentioned this - I’m not one. And this is meant as general information.
How Do You Do It?
You need to treat these expenses like true business expenses, and that means you need to track them “cotemporaneously.” That means that you need to document the expense at or about the time it happens. An easy way to do this if you have a daily planner is to reserve a section for documenting these expenses.
For instance, if you dropped $20 at last Saturday’s BW3 gathering, you would turn to 3/14 in your planner and write:“$20.00, BW3 in Roseville, Blogger gathering to discuss future plans and watch USA/Canada.” And if the trip was five miles from your house you might then scribble: $5.50, 10 miles round trip to BW3”. I think you could also instead update a spreadsheet or something with that info (including the date), so you can add up the expenses later. Just remember that it has to happen at or about the time the expense happens.
It doesn’t hurt to have receipts, but the only time you need receipts is when it is an entertainment charge that is $75 or more. So even if you walked away from the BW3 without a receipt, but you know you dropped $20, you can claim it.
How much can you deduct? As much as is legitimate. But you’re likely to receive some extra attention from the IRS if it exceeds a couple of thousand dollars per year.
Finally, when you do your taxes, you’ll want to fill out a Schedule C. You can download/see that form here. Again, if you have any questions, to be safe you should probably contact a tax advisor for assistance. Because I’m still not one. And this is just meant for general information.
Review
Let’s try boiling down this whole thing into a hundred words or so as a summary:
- If you treat your writing as a business, you can subtract expenses related to that business from your personal income, which lowers your taxes and could get you a bigger refund.
- To treat your writing as a business, at the very least you need to document those business expenses at or about the time they happen. If the entertainment expense is more than $75, you’ll need a receipt.
- You can deduct a lot of stuff, including some utilities, entertainment, mileage, research and office equipment. You’ll deduct these on Schedule C, using the supporting documentation you have from #2.
- I’m not a tax advisor. For specifics, you should talk to one. This is for general information.
The internet has changed writing considerably, and I think it’s generally been for the better. But it still isn’t clear how we’re all going to make a living from it. So many of us are just plugging along, building eyeballs, exercising our writing muscles, and hoping that business model emerges that makes sense. In the meantime, let’s make sure that we’re getting what we can monetarily from it. Hopefully this entry will help with that a little.
Even if it is just general information from a guy who is not a tax advisor.
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11 comments:
Interesting article (and I would say, yes do it, unless you own your own business or are self employed), but there is a single caveat that needs to be added (and capitalized and underlined):
The current business tax law allows you to deduct business related loss in a business for 2 years. So, after 2 years in a business, you need to make a profit (or break even) to be able to deduct loss...
Ditto what thrylos said. However, I want to reemphasize what you mentioned repeatedly in the article: consult a tax professional (or a tax lawyer). There are a lot of little legal things that can get in your way, especially if the IRS decides to pay you a visit for an audit.
The biggest thing that tricks people up is the good faith requirement: if for some reason you should end up in court or in mediation over your taxes, you need to be able to demonstrate that it was your intent to turn a profit from the beginning (that you acted in good faith). If the IRS finds you acted in bad faith (i.e. just trying to get out of some taxes rather than actually running a business), hello penalties.
I know very little about the CPA side of things, but the legal side can be very tricky. There are very fine lines; you must be able to show that you spent your time in consistent (if not constant) pursuit of revenue; you might be required to demonstrate more accurately what % of cable/internet/etc. was related to the business.
Ugh. I wouldn't know this if not for Tax and Corporations at G-Town Law. Oh well. My advice is just be very careful, and don't try to deduct business expenses on your own if it is your first time; if you have someone do it for you once, you can use it as a template from then on. Audits can be very expensive, and can come even if everything seems right to you.
I guess what I'm trying to say is that the federal government doesn't count "having fun" as a legit business purpose; the only recognized business purpose is to make a profit, and as Thrylos said, you have two years, which is why most small businesses fail so early.
The current business tax law allows you to deduct business related loss in a business for 2 years. So, after 2 years in a business, you need to make a profit (or break even) to be able to deduct loss...
OK, my info is a little different, or at least has a little bit of a different twist in two ways. First is that the IRS can't claim it's a hobby if you report a profit three out of five years. (Which is similar to saying you don't want three straight years of losses.)
But the bigger twist is that the rule is meant as a protection to taxpayers. It doesn't mean you can't deduct losses 3 years in a row. It means you're absolutely safe if you don't. But you still can deduct it and make a case for it if the IRS questions it.
And, of course, I mean that as general information. Since I'm not a tax advisor. :-)
Nice article John. I'm glad you made the comment about space in the home. Having worked out of my house on several occasions I learned a long time ago that those rules are complex and any such claim is usually red flagged. The last thing you want is to raise those red flags.
One other expense that I think is missing in your piece. Once you file your DBA with the state to setup your business you'll need to publish that in the legal notices of what I think they call "a newspaper of record" for the county in which the business is based. I know for a fact that there are(were) small business oriented newspapers in Minneapolis and St Paul that handle Hennepin and Ramsey counties. When I was in Duluth I went to the News-Tribune. I believe the Secretary of State's website has a listing of acceptable publications.
If you are going to deduct a laptop, let's say, buy a laptop and just use it for blogging as your second computer.
I do think that a laptop, and any other items you might wish to deduct (shelving, desks, min-fridge, car...i.e. equipment) is broken out over 6 or 7 years, at which time you can "sell" the items back to yourself for next to nothing and then get soemthing else.
If you can generate income, then you start looking at renting a small office or cubicle, maybe...leasing a car, office supplies and anything else.
You have to be careful about stuff like game tickets and dining out and other assorted "luxury" items. You can't spend more on such items than you take in.
Again, that fine line between hobby and business.
One minor nit-pick with John's otherwise excellent article:
Your business has lost $2400 this year. You can write that amount off, so you have $2400 less taxable income. Which means you don’t need to pay a 34% tax on that $2400, meaning you pay $816 less in taxes.
While I am also not a tax advisor, I have looked at this from my own perspective.
From John's perspective, since he has a house and family and other deductions that he undoubtedly claims as itemizations on his taxes, such an additional deduction will probably work as he says.
From my perspective, as a single person with no dependents, no mortgage, and no real need to fill out anything more complex than a 1098EZ every year, the write-off has to exceed my standard deduction to be of any value -- the write-off doesn't actually reduce your overall taxable income, but counts as a deduction to your taxable income. If your itemized deductions already exceed your standard deduction, then any additional deduction will reduce your taxable income. If, however, your itemized deductions don't exceed your standard deduction, then it doesn't matter what your itemized deductions are, since the standard deduction will be used instead, and you won't save any tax.
The standard deduction in 2008 was $5450 -- so it doesn't make any sense for me to claim $3000 in 'business losses' related to blogging, as it won't actually reduce my tax.
The standard deduction in 2008 was $5450 -- so it doesn't make any sense for me to claim $3000 in 'business losses' related to blogging, as it won't actually reduce my tax.
That just means you aren't spending enough on blogging:)
[Disclaimer: I am not an accountant and I don't even play one on TV.]
Curveball: What you're referring to is asset depreciation. Different items have different schedules. I believe the current accepted schedule for computer equipment is 3 years.
Check with an accountant about depreciating assets and how to claim it on your taxes.
Note: Everything of this nature you do pushes the red flag a little higher. Push it high enough and the IRS will see it, which may result in a "friendly" visit.
[Disclaimer: I'm not an accountant, tax adviser or lawyer. Consult with a knowledgeable expert before taking anything I say seriously.]
"If you make money two out of seven years, the IRS can’t say you’re a hobby. But even if you lose money for twenty straight years, if you run your business like a business, you can be safe."
I'm no expert either... but I think if you lose money for twenty straight years, you aren't a business, you qualify to be a federal government... or at least a large state government.
This is actually a pretty interesting thread of comments.
I think that for the average blogger out there (this includes me) who does not intent to or does not make any countable profit (does the $3.05 I "made" last year from googleads count?) trying to passing it as a business, will not cut it. It's a hobby for me and it is more than apparent.
That said, if someone is aspiring to do this as a money making business and use it as their job or income supplementation there are ways to do it that would be honest and correct and will not push out "red flags":
Spent $200-300 and make a corporate entity out of it. Money well spent because at that point one will be able to deduct their full cable/DSL internet bill, which annually is more than that $200-300 (if it's not, tell me your provider, I want to join). Corporate entities are not subject to the 2 years without a profit deduction bit (but, their tax schedule is slightly different - Corporate tax returns are usually due in February/March.) The depreciation of "assets" (see: computer equipment is pretty much the same - 3 years.) Tickets and hotel rooms to Ft. Myers for Spring training and a percentage of restaurant bills are fully deductible, if you are going to write about it. And so on...
But you do need an accountant.
And (even more importantly) I am not sure that there is any way one can make a real sustainable income out of this. It is a labor of love (or lust). We do it because we want to and there is not much money in it, unless someone gets a job because of it with one of the big boys, but then it will be a regular job...
just my 2 pennies
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