Blogging and the IRS

Well………blogging and accounting related topics, what more could I ask for………right??

Tonight I had the amazing opportunity to be the featured speaker on the first ever Mom Blog Society live chat.  The chat was titled “Avoid IRS audit, learn how to claim your blogging income, including your gifts from reviews.“

I might be biased, but I feel that the chat went well!!  It was scheduled for 1 hour and ended up running about 1hr45m with all the wonderful questions that were asked in addition to the four sections the chat was built around.    Below are the four sections I created for this chat conversation based on the research I performed.

Like any good professional, I need to add a disclaimer: Unfortunately, it is impossible to give comprehensive tax advice over the internet, no matter how well researched or written. Before relying on any information provided in this chat/document, contact a tax professional to discuss your particular situation.

Avoid IRS audit, learn how to claim your blogging income, including your gifts from reviews.

1.       Is your blog a hobby or a business? 

The answer to this question will determine what sort of deductions you are able to take with regards to your blogging related expenses.

Generally, an activity qualifies as a business if it is carried on with the reasonable expectation of earning a profit.   If you are questioning if your blog qualifies as a ‘business’ there is a list of factors to help make the determination on the IRS website, such as:

• Does the time and effort put into the activity indicate an intention to make a profit?
• Does the taxpayer depend on income from the activity?
• Has the taxpayer changed methods of operation to improve profitability?
• Does the taxpayer have the knowledge needed to carry on the activity as a successful business?
• Has the taxpayer made a profit in similar activities in the past?
• Does the activity make a profit in some years?

If an activity is not for profit (AKA hobby), losses from that activity may not be used to offset other income. An activity produces a loss when related expenses exceed income.  Internal Revenue Code Section 183 (Activities Not Engaged in for Profit) limits deductions that can be claimed when an activity is not engaged in for profit.

 In easier to understand terms, expenses incurred in the operation of a hobby can only be deducted up to income that is made from the same hobby activity.  Any expenses incurred in excess of related income are NOT deductible on your tax return.   These expenses for hobby related activities are claimed as itemized deductions on Schedule A of the Form 1040.  This would be the same schedule that you use to deduct mortgage insurance, medical expenses, etc.  Please refer to the IRS Website by clicking (HERE) to determine the order in which these hobby related expenses must be deducted.

2.       Defining bartering transactions.

The IRS website Topic 420 defines bartering as; “Bartering occurs when you exchange goods or services without exchanging money.”  It goes on to explain, “The fair market value of goods and services received in exchange for goods or services you provide must be included in income in the year received.”

Therefore, when you are provided a product to review, you complete the review and then keep the product that you reviewed; this is in fact a barter transaction.  As stated above, in the IRS literature, you are required to report the fair market value of the goods you received as income.
This income can be offset, on Schedule C of the Form 1040, as stated here,  ”If you are in a business or trade, you may be able to deduct certain costs you incurred to perform the work that was bartered.”   Hence, the time you spent in performing the review can be deducted at the fair market value you would have charged the business for the review had the product not been provided as a form of payment for your services.

3.       What income is to be reported?

To account for your blogging income, both monetary and barter income, use Schedule C: Profit or Loss from Business a schedule which is then attached to your Form 1040 (individual income tax return).   Income related to your blogging endeavors could include the fair market value of the goods you receive in exchange for product reviews, cash/check payments received for reviews performed, etc.

It is a common misconception that income earned, from one individual or one company under the $600 threshold for issuing a Form 1099-Misc, is not required to be reported as income to the IRS.  However, this is incorrect as there is no least amount of income that you may deduct from income related to the operation of your ‘business’ (blog).   If a Form 1099 is not issued, irrespective of amount, all income must be reported as income on Schedule C.

4.       What expenses can be deducted?

Expenses that can be deducted against your blogging income include all expenses that are deemed ordinary and necessary for the operation of your business (blog).   The definition provided by the IRS in Publication 535 defines “An ordinary expense is one that is common and accepted in your industry.”  Further it goes on to define, “A necessary expense is one that is helpful and appropriate for your trade or business.”

With these definitions taken into consideration the following is a list of examples of possible deductible expenses for a blog business;

* PayPal fees or shopping cart fees
* Shipping fees and supplies
* Postage
* Office supplies – pen, paper, toner, folders, etc.
* Advertising  (websites used to advertise your blog)
* Phone – cell phone or second line
* Bank charges – related to checking or business accounts
* Accounting and legal fees
* Computer and software
* Internet Service
* Web site hosting costs
* Domain registration fees and annual costs
* Contract labor  (fees relating to web site design etc)
* Membership fees
* Continuing education – any classes completed to improve your blog/business knowledge

Please note that this list is NOT all inclusive, but is merely a representation of possible internet business related expenses.  If you are questioning whether a particular expense is deductible on Schedule C, please consult with a tax professional for ultimate determination.

Like any good professional, I need to add a disclaimer: Unfortunately, it is impossible to give comprehensive tax advice over the internet, no matter how well researched or written. Before relying on any information provided in this chat/document, contact a tax professional to discuss your particular situation.

Thanks again to everyone who joined us for the live chat and I do hope you’ll be there next week for our next Live Chat in which we’ll be talking about Google+ now that GFC is going away in early 2012.  Please check out MOM BLOG SOCIETY for all the details, which should be updated on Monday!!