This post was originally published on 12/20/09. Since I have been receiving a lot of searches on the topic and I’ll be having my taxes done this week (hold me!), I decided to repost it for newer readers. Enjoy!
After a recent twitter stream talk about blogging and money, I noticed that there was a lot of confusion regarding the tax implications of blogging. I thought, “I would love it if someone would do a post about this to clear up the confusion.” Then, I thought to myself, “I know CPAs, why don’t I just do it myself?” I sent out a tweet to see what the most common questions were regarding blogging and taxes and sent the responses to Kelly (Mrs. CPA).
After receiving her responses (which I am sharing below), it just reconfirmed my thoughts regarding any business: it is important to have your own lawyer and accountant. It is better to be safe than sorry. As Kelly said, “I don’t know every bloggers’ particular tax situation, and my advice may not fit everyone. People should consult their own tax advisor if necessary.” Meanwhile, here are the answers to some common questions:
Let’s talk about a hobby vs. business first. The IRS presumes that your business is a real business until you have losses three of the last five reporting periods. If you are blogging with the intent to make money, there is an automatic presumption that you are running a business. You would report your income and expenses on a Schedule C. If, after three of the last five years, you have a loss on paper, your income will be reported on page one of your return and your expenses are reported as part of your miscellaneous itemized deductions. This amount would be subject to the 2% limitation, which means that whatever your total income is, you take 2% of that number. Whatever your expenses are that EXCEED the 2% number are deductible. So no matter what your income is, you’re going to lose 2% of your deductions at a minimum. If you don’t itemize you don’t get any deduction for hobby losses.
Bloggers are responsible for paying taxes on goods and services they receive. It helps if you know how the IRS looks at income and expense items. If someone takes a deduction for something, someone else has to report it as income. Your employer takes a deduction for wages, you report it as income. An advertiser takes a deduction for sending you an item to review, and you report it as income. That’s pretty much the rule. The IRS says ALL INCOME is taxable unless the code says otherwise. There is no dollar limitation. Everything from a tube of chapstick to a new dishwasher is taxable.
But what do you do if the company doesn’t send you a 1099 to report the value of the item(s) they sent you? Most of the time, the items are not over $600, so the company isn’t required to send you a 1099. That doesn’t mean your review or swag item isn’t taxable. It just means you’ll have to dig a little to see how much that item is worth. For most things you can easily find the retail value of the item and that can be your basis of reporting. If you have to, you can always ask your contact for a dollar value on the item you are receiving.
If you give an item away that you never touched, that’s up to the advertiser and the recipient to determine the taxable action. If the advertiser sends you two items and you give one away, it’s like you are just holding the item until shipment and it’s not your responsibility to send a 1099 or worry about the person receiving the item. The winner is responsible for reporting the income that is a result of the transaction. If you receive an item, review it and then send that exact item to a reader, you have the income of the item and then the deduction of giving it away, a wash. If you give the item away to charity, you can take a charitable contribution for that item. Make sure that you are reporting income; otherwise you have no basis in the item and there’s no deduction available.
There’s no time limit for donation or sending out prizes other than the tax year. If you receive something on January 1, host a giveaway, and actually mail it out to your winner on December 30, aside from having an irate giveaway winner, you have income and deduction in the same year. If you wait to mail it until January 3 of the following year, you have income in one year, and a deduction in another year.
Any paper you have that shows the value of the item you received or gave away, your postage costs if you had to ship to the winner, or anything else that supports your position on your return should be kept with your tax return documents until the statute of limitations runs out – normally 7 years.
The IRS did a crackdown recently on awards show swag. We may not be attending the Oscars, but sometimes the swag we get is worth several hundred dollars. That’s taxable. Someone donated those items to be given away.
If a PR agency invites you to a party for bloggers, they are taking a deduction for that. The venue is reporting that as income. Not the blogger. When you go to a company Christmas party, your company doesn’t add your portion to your paycheck. The restaurant reports the income.
Let’s say Delta Airlines wants to foster blogger goodwill and they fly 10 bloggers somewhere in the continental US and have them report back on their experience. That’s taxable. You can figure out what the cost of that flight would be. It was free to you and the company providing the service donated it. Let’s say you are invited to the Grand Canyon. The PR agency pays the airlines for your ticket, the limo company for your ride to and from the airport, and the cost of your meals and hotel stay. The Grand Canyon pays the PR agency – a deduction and income – and the PR agency pays the vendors – a deduction and income. You just happen to be the recipient of the income and deduction circle that all gets reported by someone else. Basically if someone donates their product or service directly to you, that’s taxable. If they pay someone else to provide a service to you, that’s probably not taxable. You got value out of the transaction, but it is being reported as income somewhere.
When you start making money, a good accountant will save you tons of time in the long run. They can help you determine whether you need to start making estimated tax payments and when. To avoid an underpayment penalty, you have to have pay in 100% of your prior year’s tax, 90% of your current year’s tax, or if your adjusted gross income was over $150,000 in the prior year, you have to make estimated tax payments that total 110% of your prior year’s income. Some of this burden can be alleviated by adjusting your withholdings on your or your spouse’s paycheck. Doing a projection in the middle of the year and in December can help you estimate what you need to pay in. Even if you aren’t required to pay income to avoid a penalty, it doesn’t mean you don’t need to hold back money from your earnings. Putting it in your own savings account and earning interest on it until you have to pay it in to the government is a better deal for you.
Here are three more articles that talk about the business of blogging and the tax implications of it:
IRS Circular 230 Disclosure: As required by U.S. Treasury Regulations, we advise you that any tax advice contained in this communication is not intended to be used for, and cannot be used for, the purpose of avoiding penalties under the United States federal tax laws.