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Taxes for Online Money Bloggers

For many of us, the transition from blogging as a hobby to blogging as a business was subtle. We made a little money one day and started making money every day since. With revenue there is profit and loss. With profit and loss, there are taxes. Of course, we had hoped we’d turn our websites into revenue, but how much time did we spend thinking about how business decisions would translate into business expenses and tax deductions?

It’s a little sad, but I spend an awful lot of time thinking about the taxes of other Online Money Bloggers and this post is going to prove it. There is plenty of basic business tax information for bloggers at many great sites, so I won’t bother taking you through the weeds. This post is about some of the more nuanced expenses I’ve seen many of my blogging friends make in the last few months and the tax considerations that come with it. While I hope I might shed some light on a few situations, my main goal is to show how personal spending and business decisions can have a big effect on taxes.

(Side note: I am not a tax professional. I’m just a guy who has been working on taking the CPA exam for a while and works in corporate finance. That’s why I’m including relevant IRS documentation for you to look into on your own.)

Promotional Expenses

Congratulations! Many of you have some serious promotional expenses to deduct this year.

Although I could easily fill up the pages with links to everyone’s contests this year, I’m going to use Your Finances Simplified’s Holiday Give Away, because I did the most unmanly act of liking a FB page for women’s shoes to win it. I failed and now I get all the best deals on designer high heels. The money YFS used to fund the prize, $50 cash, plus any other expenses directly related to the promotion is 100% tax deductible against his income.

Probably, no one is surprised.

But what about Corey’s December promotion for his carnival submission service? At the end of 2011, Corey offered a free trial period for his carnival submission service to bloggers in order to help jump start his new venture. I know that many OMB bloggers signed up, which was a large time investment on Corey’s part. YFS ran a promotion and was able to deduct the promotional expense, can Corey deduct the $20 per person that he is foregoing by offering a free trial?

YFS can deduct the expense, but Corey probably cannot. Promotional expenses are determined by cost, not revenue it would have generated. Corey didn’t pay anyone to provide the service and therefore he cannot deduct the expense.

However, if Corey were to incorporate, then start drawing a salary, his tax paperwork would dramatically increase to eye-popping levels, but he would have been able to deduct the promotion.

Entertainment Business Expense

You know what benefit you get out of attending FINCON? Networking! What better place to network and grow your blog than at a club; John Barleycorn courtesy of Ramit Sethi to be more precise. So if Jana spends money at the bar with the intention of networking, she can write her bill off on her taxes as a business expense, right?

Nope!

For the most part, any expense that you make for the benefit of business networking is tax deductible, but as with many things, there is one very important factor: location, location, location. IRS guidelines state that the location where you conduct your business entertainment must have an atmosphere conducive to business. The document specifically calls out clubs as an example of where noise, hustle and bustle make for an unlikely location for serious business purposes.

What can I say? The government unfairly favors golf when it comes to tax advantages. Those are the rules. Before you set a business meeting, make sure you pick a place with the right business atmosphere.

Start Up/Acquisition Costs

Jon’s been out buying blogs to be the best of the online money bloggers. Obviously Jon can deduct the purchase price of a blog against his income in a year. The real question is how much expense does he want to take?

Now that you own a business, some of your costs are going to allow you to embark on a tax strategy known as income timing. Flexibility in taking and reporting expenses often allows you to defer or accelerate some of your tax deductions. Start up costs is one of those expenses.

The IRS allows you to fully deduct startup costs in the current year or amortize over future years. Generally speaking, most people choose the accelerate deductions strategy, but there are times where deferring is smarter.

Let’s say that with Jon’s new income, next year he will find himself in a higher tax bracket or that congress is going to raise income taxes. It would make sense to amortize the start up costs and avoid the higher taxes in the future.

With any of these cases, the important thing to understand is that owning a business gives you options where tax considerations are concerned. Those options can be used to your advantage, but only if you understand how business taxes work.

This post has been written by Shaun from Smart Family Finance. Be sure to check out his site for some more excellent finance tips!

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6 Responses to Taxes for Online Money Bloggers

  1. Corey says:

    Great post Shaun! A lot of helpful tips especially at this time of year. I am getting ready to pay my first estimated tax for 2012. ughh. :)

  2. I know the feeling, although not the pain. I hired a tax professional. I certainly know how to do my taxes, but I’d rather keep blogging passive and spend my time earning money and making content, not filling out forms.

  3. This is a great post with very useful information. It is a good thing I golf. I will have to remember that when it comes to business deals.

  4. Great tips about tax time. It is so important to get all the deductions you can!

  5. @ CFM – Thanks. While I think congress is obviously biased towards gold when it comes to taxes. I really don’t mind.

    * Robert – The nice thing about owning a business is that you can take more deductions.

  6. Great post! Very enlightening. :) Thanks for sharing.