Monday, November 15, 2010

Is your Blog or Website a Business or a Hobby?

Many of you have taken time to read my post about Google ad revenue being considered self-employment income and the need to report that income on your personal income tax return on Schedule C (IRS tax form) for income from a trade or business.   On Schedule C, you may claim expenses related to this income  to reduce both the income tax and self-employment tax.

While your expenses may be claimed to offset your blogging or website revenue to zero, you may experience a situation where your expenses exceed your revenue, resulting in a business loss.  Ordinarily, business losses may be claimed as an offset to other income on your personal income tax return, such as wages, interest and dividends, or retirement income. However, if a loss is attributable to an activity not engaged in for profit, the loss is not allowed as a deduction against other income.  The IRS and tax practitioners refer to this limitation as the "hobby loss" rule.

There is a presumption in the US tax law that an activity is presumed to be engaged in for profit if gross income is greater than expenses for 3 out of 5 consecutive tax years. Just because you meet the presumption, you are not necessarily free from challenge by the IRS if you have small profits in the 3 out of 5 years compared to large losses in the other 2 years.

You are not necessarily dead in the water if you can't meet the 3 out of 5 year test.  If you claim business losses on your tax return in more than 2 out of 5 years, you don't submit any extra paperwork with the return you file your tax return, but if you get audited by IRS, you will need to be able to prove by facts and circumstances that your blog or website is a business activity that is engaged in for profit.

Some of the factors that get considered in determining whether you have a business or a hobby are:


  1. Whether the activity is conducted by the taxpayer in a business-like manner.
  2. Whether the taxpayer has the appropriate expertise to conduct the activity.
  3. The amount of time and effort spent by the taxpayer in carrying out the activity.
  4. Whether assets used in the activity are expected to appreciate in value.
  5. The taxpayer's success in other activities.
  6. The taxpayer's history of income and loss from the activity.
  7. The amount of any occasional profits from the activity.
  8. The financial status of the taxpayer.
  9. Elements of a personal pleasure or recreation in the activity.
Referring to your activity as a "labor of love" or a "hobby" is probably not a good fact. 

Hobby losses aren't the only hurdle you'll have to jump through to claim business losses against other income.  There are also at-risk rules and passive activity rules to consider.  

My original post was concerning your ability to offset your blog and website income with deductions.  You are able to do that even if your business is considered to be a "hobby" for tax purposes.  But, you won't necessarily be able to offset other income you may have earned with the extra expenses from this activity.

Complicated? Yes.  Consult your tax advisor for a more detailed analysis of your situation.  This article is general in nature and may not take into account all aspects of your tax situation.  You can't rely on this article to avoid penalties with the IRS or your state government.  Plus, if you are reading this in another country besides the United States, your laws may be different. 

4 comments:

Anonymous said...

Thanks for the post.

I am going to say that my blog is a business, if I purchase a computer soley for this business would that be a valid deduction?

Right now I use a shared home computer but I think it would be better for business record keeping to have a separate computer, to me it makes sense as a deduction but I read through the IRS website and it's very confusing.

Taxman45 said...

Buying a computer is not an expense, but the purchase of an asset. The cost of an asset is recovered via tax depreciation (also called MACRS). You report the asset purchase on Form 4562 attached to your US return. There is an election (Section 179) that businesses can make for most business assets to expense them outright in the year of purchase. That election is also made on the Form 4562. The tax deduction you can claim for this 179 deduction is limited to the net income from the business, so if your blog is a close to break-even business, it may take more than one year to recover the cost of the computer.

Computers are a bit confusing for home-based businesses because the IRS calls computers "listed property". Listed property means that the IRS views these assets as having greater than normal probability of being used for personal use. So the IRS makes you substantiate your business use by keeping records.

You should choose a return preparer that is familiar with these rules and they can help you sort out some of the complexities that I'm leaving out of this brief response.

FoodGuy said...

Thank you for the useful information. Just wanted to give a specific case in hopes of clarification.

I'm considering starting up a food/restaurant/all things culinary critique blog. My hope is to work towards earning a profit and running it as an outlet to provide people with examples of my writing as a critic. I don't expect to turn a profit quickly, but do intend to start the blog with eventual profit in mind. Possibly leading to more opportunities for writing as a culinary critic.

My question then is whether expenses associated with research needed for my blog would be deductible. Namely the price of meals at the various restaurants I'll be reviewing. What about web hosting fees? Can I claim them as a business expense?

Taxman45 said...

Hey Food Guy!

Your blog idea sounds very satisfying (especially if you're hungry!). You should be able to deduct 50% of your business meals if you document the business purpose and keep good records. Web hosting expenses should also be deductible. However, you may be limited in claiming expenses that exceed your gross income if the hobby loss rules apply as described in my original post. Discuss your blogging plans with your tax advisor as part of your year-end meeting or when you bring your tax information to them for your 2010 returns. And if you need a tax advisor, head on over to billmirandacpa.com. :)

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