Wednesday, January 13, 2010

Blogging and Taxes

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. What's more, it's a repeat story, but since it's tax season, and since I don't really have time for a decent post anyway, let's run with this for today.

Besides, maybe it'll make you some money.

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 adviser. You should not mistake what I’m saying for advice from a tax adviser. 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 adviser. In fact, most of what you’re going to read here can be gleaned from spending about 45 minutes with a tax adviser. 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.

Then your business 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 adviser. 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 adviser 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 MN state government 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 adviser. 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 2009, I think it was $0.55 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 adviser 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 “co-temporaneously.” 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 adviser 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:

  1. 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.

  2. 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.

  3. 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.

  4. I’m not a tax adviser. 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 adviser.

10 comments:

thrylos98 said...

This is pretty close, but a couple of clarifications needed:

a. In order to deduct expenses as a business, you need to prove that you at least make an effort to have a profit (in your case, this is a no-brainer, given that you published and sold the Twins-centric stuff, for sure). Google Adsense might cut it

b. Loss can be deducted only for X years from a "business" if you are self-employed and do not have an LLC or an inc. If you have an LLC or an inc (and maybe if you register your business with the state - not sure about that part), you would also need to file business taxes, and if you sell something collect and pay sales tax. The business tax filing schedule is different than the individual one (ie. 4/15 deadline)

c. As far as what expenses you can deduct, in this day and age there is a lot of scrutiny. To have your rear end covered and not be in for a nasty audit surprise, you need to pretty much link each expense to an effort of making money. For example season tickets so I can write a blog and make ad revenue, won't cut it. On the other hand, a ticket to a single game, parking, mileage etc to create a write up for the game that will be sold for profit, will cut it (but you better have a deal to sell a write up or possible make attempts to sell it)

d. Cell phones, internet connection and stuff is all proportional. If 90% of you cell phone use is personal and 10% is involved in blogging (like calling Twins players and staff), you got to just deduct that 10%.

Anonymous said...

I smell an audit coming

TT said...

I agree with Anonymous. Although I don't know what is likely to spur the IRS to do an audit, I would be vary careful with this. You need to have a serious plan to turn a profit and the expenses have to be related.

Nammer said...

My dad is an accountant... he says you need to be VERY VERY VERY careful if you try that method. IF you been blogging for 'X' years and not had a significant income and write off expenses, they may consider it as tax fraud. To the Government, blogging can be just a personal recreational/entertaining thing. If you have an LLC and pay texas for having a business, you probably don't have to worry about that, but I have a feeling you didn't register and pay for an LLC.

My option... not worth the risk of an audit.

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John said...

Well, I'll say what I said roughly half a dozen times - talk to a tax adviser. If blogging is more than a hobby - if you're actively trying to turn it into income, it's worth exploring.

It's CERTAINLY worth the time to sit and make a list of expenses that you think could be related to your efforts to make money. After you do that, you could talk to a tax adviser and see if you can use this info.

And for the record, this story came from an interview with a tax accountant. In addition, I had him read over the entire post before I posted it.

Brian said...

John-

Thanks for this. I'm not a blogger, but I work as a professional actor, and am self employed, and a lot of the rules are the same.

The best advice I can give is to find an accountant who is an expert in this sort of deduction. It shouldn't be too hard. I bet at least one reader can give a recommendation.

I pay far less to my accountant than she saves me. And she makes ALL my liability go away. Because she's magic.

Especially if you are earning 1099 income, you need to look into this.

TT said...

Here is a link to the IRS on the distinction between hobby and business:

http://www.irs.gov/newsroom/article/0,,id=172833,00.html

StreetGirl said...

I wonder how many people can actually make a living out of blogging.

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