Hi there! Less than one month away and it’s tax time, at least for those of us in the states. Many of you may be wondering if you can write off expenses related to your blog, so let’s discuss.
You’ll need to answer the following question:
Is your blog a hobby or is it a business?
According to the lovely Internal Revenue Service here is the difference (IRS, did you see I called you lovely, wink wink):
The Internal Revenue Service reminds taxpayers to follow appropriate guidelines when determining whether an activity is a business or a hobby, an activity not engaged in for profit.
In order to make this determination, taxpayers should consider the following factors:
• 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?
• If there are losses, are they due to circumstances beyond the taxpayer’s control or did they occur in the start-up phase of the business?
• Has the taxpayer changed methods of operation to improve profitability?
• Does the taxpayer or his/her advisors 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?
• Can the taxpayer expect to make a profit in the future from the appreciation of assets used in the activity?
Basically, you need to “make a go” at a profit AND for at least three of the first five years need to realize net income not loss. If this is your first year of using your blog for profit, then this can be considered your “start-up” year; meaning it is expected to have an investment of capital or expenses such as marketing, site security, web hosting, web development that is not offset with income (not yet, at least).
I know you’re wondering, “now what?”
If you’re just starting out, I bet you know exactly how much (or how little) income you’ve made from your blog. I was so very proud to announce my first $7.47 paycheck from the Foodbuzz Featured Publisher program. Sadly, my husband was not as impressed.
If you participate in publishing programs like BlogHer or Foodbuzz, you are part of an Affiliate program, or you offer advertising on your site, all of this trackable income needs to be claimed (& taxed). But just wait. . .
If you don’t already have a box filled with receipts of your blog business expenses, you need to track them down. I keep mine in a bright blue box under my desk with notes identifying the project I was working on. It helps to be pro-active and be somewhat organized or you waste a lot of time digging in junk drawers looking for crumbled pieces of paper.
Make sure to smooth out the creases from stuffing your receipts in bags so you can see the numbers clearly. You want to document every penny you’ve spent on your business so you can offset that big $7.47 from Foodbuzz. Oh, & don’t forget online receipts for workshops & classes, business related magazine subscriptions, Paypal or Amazon receipts. These expenses add up fast.
Once you have your documentation, you need to dig in. It helps to have a Venti Mocha nearby to keep your eyes from rolling back into your head.
For your tax preparation you’ll need to make a P/L statement; that’s code for Profit and Loss statement. Don’t worry, your P/L does not have to be fancy, just accurate. The IRS is really picky about accuracy for some reason. Really, all we are trying to get to is calculating Net Income/(Loss) & categorizing your Expenses.
Therefore, you’ll need to calculate your “Sales” or “Gross Income”; this is the fat check for $7.47 I was talking about. That will be my starting point.
To calculate Net Income or (Loss), you’ll take sales & subtract expenses. For your expense summary, you can categorize your costs however you’d like. I stick with a basic P/L account listing & add up my receipts for each category.
Wages: Employee Wages
Shipping & Postage: Cost for Shipping Product
Benefits: Employee Related Benefits
Depreciation: On Capital Assets
Rent Office Space: Leased Space
Rent Equipment: Printer Rentals, etc
Utilities: Electricity, Water, Trash
Credit Card/Payment Fees: Paypal & Merchant Service Transaction Fees
Housekeeping: Cleaning Services
Property Taxes: If Applicable
Repairs & Maintenance
Travel/Meals/ Fuel: For Business Related Travel
Supplies: Office Supplies
Advertising: Magazine or Online Advertising
Subscriptions: Magazine or Membership Dues
Education/Training/Workshops: E-Classes Used to Grow Profits
Telephone: Office or Cell Phone
Consulting Fees: IT, Legal, Finance Consulting
Insurance: General Insurance
Licenses/Permits: Business Licenses, Permits to Operate, etc
Bank Charges: Late Fees or Interest Incurred
Misc. Expense: Everything Else That Doesn’t Fit in Categories Above
Total Your Expense Categories and if you’re like me, your first year of business your expenses are higher than your $7.47 in sales or income. This is okay. I took my whopping $7.47 and subtracted my expenses & came up with some outrageous LOSS. I input my loss & my categorized expenses in my tax forms & the amount was deducted from my total household income.
My first year of blog business was a ramp up so I expected to see a Net LOSS. The loss made me want to cry, but I knew it was temporary. For those lucky ducks with PROFITS, celebrate! Open a bottle of bubbly! You are headed in the right direction.
If you’re looking for a tax program, I highly recommend Intuit’s Turbo Tax Business. For any other questions, please consult a tax professional or dig into the informative IRS website.
Find Shannon at her blog: Living With Umami
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