Taxes

Blogging: Hobby or Business

Is your blog a hobby or a business?  Blogging everyday but not making any money?  Blogs can make some big money and others fail.  Here is how to properly report that hobby income and report the offsetting expenses so the auditor stays away.

Audit Keyboard

Audit keyboard from Flickr

Disclaimer, this is not to be referenced as legal tax advice, this is just a helpful guide if your blog is being audited~

How to report income from a hobby:

Yes, its time to admit it, your blog is a hobby.  That $601 you made last year gave you enough to receive a 1099 from Google and now how do you report it?

It would be nice to be able to take all of the expenses and have a nice loss to offset that day job wage… but chances are Uncle Sam will find it and reverse it, then you’ll be stuck with a bill + penalty + interest.

    1. Income:  This is reported on the Form 1040 Line 21 of the 2016 tax year.

      If Google sent you a 1099 for $600 chances are the government received a copy of that, so yes it needs to be reported somewhere on your taxes.  The location varies by business entity, so I’m speaking to the newbie that does not have a partnership or corporation set up.

    2. Expenses:  This is reported on Form 1040 Schedule A Line 23 of the 2017 tax year.

      As noted in income, location of these expenses can vary by business entity.  So, basically this is for the 1040 guy or gal out there.

      1. Include a portion of internet costs (not full amount because Netflix doesn’t count as a business subscription)
      2. Subscription costs for researching articles
      3. Costs of the blog
      4. Pinterest add costs
      5. Costs for photo editing
      6. Costs for sound editing
      7. Cost of photos

CyberChimps LLC

Note the Expenses amount cannot exceed the income reported.  If $750 was reported as income, then the expenses are limited to $750, even though there may be more expenses incurred.  But, if there were only $400 of expenses then you have to list the $400, making up additional expenses is not allowed.

9 “Hobby Loss” Factors:

    1. Manner carry on Activity: This is why its important to keep track of how often blogging is happening.  If there is a day job they want to say there isn’t enough time to blog, but who isn’t thinking about what they are going to blog next when they are sitting in the cubicle jail, uh, I mean office.
      1. Were new techniques developed?
      2. How are the books and records maintained?  This is where a separate bank account is important.
      3. Keep track of expenses, try to show where turning a profit.
      4. Blogging business plan would be helpful here.
      5. Then show where using records to make decisions and changes in business operations.

All Themes Package

  1. Expertise: Noting any other websites used to base the blog on can be helpful. When decisions are made what is behind them?  This can be important in showing that research was completed and any growth in the blog audience.
    1. A list of advisers can be helpful, I’d use a list of other bloggers of same niche.
    2. New techniques used are documented here too.
  2. Effort Expended: We all know there isn’t enough time in the day to blog, work, and live, but this is where it gets tricky.  Can I really say between phone calls at work, I’m promoting my blog via Twitter or Pinterest?
    1. They want to nail down hours worked on the blog vs all the hours available in the year.  Keep track of time spent:
      1. Posting to Pinterest, Twitter, Facebook: Promoting Posts
      2. Writing
      3. Researching Topic
      4. Photo-editing
      5. Following up with tribe (aka followers)
    2. To overcome the alternative passive activity make sure the time exceeds 500 hours for the year.
  3. Assets appreciate in value:  So, is your blog actually worth something?  Could it be sold to a third party?  Even thought there isn’t land or equipment don’t rule out the value of the website itself.
  4. Success in similar activities: The day job might be the major income provider for household, but what other activities like the bog have brought in cash?  And make sure it has been reported elsewhere!
    1. Maybe there is a second blog
    2. Could have a YouTube site
  5. History of Income and losses: This is hard to overcome if the blog isn’t making any money.  These are just cold hard facts here.
  6. Occasional Profits: If the blog is going to sell for big bucks next year this could impact this factor.  THe sale of the blog might overcome all the incurred losses.
  7. Financial Status:  If the day job is paying big bucks, this might be a hard one.  If you are a broke blogger (like me) then this would be in your favor!
    1. Why?  The hobby of a blog is really to offset other income?  Or is it really to make a profit?
    2. Are there tax savings by having the blog?
  8. Personal Pleasure:  Blogging can be fun and it is work!  All the tasks to get from the original idea to the final post and everything that goes behind posting it will show how much hard work we all really do!

What if I don’t report anything?

Yeah, that is another option, what’s $600 to Uncle Sam anyway?  Well, truth is they have automated a lot of the crosschecking and they know there is $600 not reported.  They’ll automatically send out a letter adding it to your return and adding interest and penalty on top of that.  It won’t break the bank, but it can be scary and annoying to get random letters from the government.

I don’t even make $600 from my blogging, so whats less than a hobby?

Still planning your expenses, check out my Midyear Tax Planning article here.

If nothing else, just be sure to file a tax return:  Save 30% at E-file.com
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Blog under Audit

Blogging along, then a letter arrives…  Time for an audit?  Here are a few suggestions on how to survive when your blog is under audit.

Disclaimer: Take audits seriously and if you can afford to hire someone to represent you do it!  The following are suggestions based on experiences of clients at my day job.

Documents:

What to provide?  Do I hand it all over?  It is imperative that the only records provided are the ones they ask for and even then, willingly handing over records can hurt the bottom line as well.

  1. Income:
    1. Bank Records:  The benefit to having a separate bank account is to provide only these statements.  Otherwise if everything is given then they’ll try to count nontaxable income as taxable.  Nontaxable income can include: Refunds, credits, coupons, rebates, do you have documents for all of this?  If not it’s income!  Nooo!
    2. Printouts of income producing websites: i.e. Google Adsense and nothing more
  2. Expenses:
    1. Use QuickBooks or other software to track everything?  Do you tell this to the auditor?  If confirmed they’ll ask for the download of the year under audit.  Garbage in = Garbage out and its added to your taxes.  Try to provide receipts, since the blog is small there will be few records anyway.  If QuickBooks is your thing, make sure the data is accurate.
    2. Business Use of Home: If they ask to tour your office (business use of home deduction) be sure to get it set up before they arrive:
      1. is it exclusive to blog? Move kids toys out of there
      2. is there a door? Make sure the space is closed off to rest of house
      3. Do you really want them at your house?  If so, don’t leave out your expensive collection of high priced nick-knacks, because they will notice it and ask you how you pay for it.
    3. Other receipts:
      1. Internet connection: make sure personal use is allocated out of the bill
      2. Print receipts out of email
      3. Keep paper receipts
    4. Hobby Question:  This is bad, very bad, see my article on how to combat this here.
  3. Interview:  Do everything possible to avoid face to face contact with an auditor, because they’ll get you to talk about what you love (your business) and then they’ll find out more than you need to share.  Also, be cautious of any phone calls from the government due to rash of scams.

Timeline:

The timeline for an audit:

  • Receive a letter: Usually 30 – 45 days to respond.  If they contact via phone, be suspicious!
  • First face-to-face meeting: Send the representative, but if you must attend set it up for a Friday.  Reasoning for this is the auditor won’t be able to meet with their manager until after the weekend, and hopefully the auditor is thinking about their weekend and not your records
  • Missing records:  If they ask for more proof of expenses (i.e. a document request) then they’ll give a deadline, its not the end all if this is missed, records get lost, moldy, burned, shredded.  It happens.
  • Final Report: Usually two weeks (14 days) to respond
  • First Notice: 30 days to respond
  • Statutory Notice of Deficiency: 120 days, now is the time to send in records
  • Tax Court: unknown

Audit Survival Guide:

  1. Less is better
  2. Don’t give them what they don’t need
  3. Keep separate bank accounts for business income
  4. Keep records now
  5. Organize emails: Set up income and expense folders
  6. Hire Professional Help!
    Vaping Industries

    Audit Keyboard

    Audit keyboard from Flickr

Scammers are after you

A new day a new tactic, scammers have no dignity, scamming social security, charities, and the IRS.  It is downright scary!  Everyday I get another email or roll across a website cautioning everyone about another scam.  There are the strange phone calls demanding money for loans that don’t exist. They say the local law enforcement or border patrol is coming to get me.  Send them over, I just made a fresh pot of coffee!

Red-Flags to Scammers:

IRS-Impersonation by Telephone:

I’ve even had this one happen to me recently.  They are really aggressive.  Saying they’ll send over the local law enforcement unless you give them the information they want (specifically your credit card number).  This is not how the IRS works.  They don’t call people out of the blue anymore.  In most audits they will send a letter on initial contact, they have ID’s, they have ID numbers and they’ll gladly give you their managers name and number.

The IRS will never:

  • Call to demand immediate payment
  • Threaten to immediately bring in local law-enforcement
  • Demand you pay without giving you opportunity to appeal
  • Ask for credit or debit card numbers over the phone
  • Can’t take payments via iTunes gift cards (newest scam)
Email, Smishing, Phishing and Malware:  

Identity theft via text message is smishing, via web or email its phishing!  The scammers are fraudulently using the IRS name or local to dupe people into giving them their personal information.  A typical example is to follow this link to a fake website and log-in.  Upon logged-in to a fake website the scammer will now have your information!

I recently received an email from my bank saying that I needed to log-into my account to verify a purchase (of course the email offered a easy link to the bank).  This could easily catch someone who is in a rush or just not thinking about identity theft, which is what scammers rely on.

Malware is short for “malicious software,” malware refers to software programs designed to damage or do other unwanted actions on a computer system.  This can be unknowingly loaded by clicking on a website, thru a text message or emailed link.

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Midyear Tax Planning

Tax Planning, in the summer?  News Flash, there is more than one day of the year to worry about taxes.  As a blogger I watch my bottom line very closely and try to keep my income and expenses in check.  Now that we are done with two quarters of the tax year it is a good time to assess profitability.

Profits:

If it appears that 2017 is going to be a stellar year watch out because  with positive income comes a high tax bill!  Now is time to have a plan, not April 15th or December 31st.   Summer tax planning is important as end of the year tax planning.

  • Buy Equipment:  Summer might be a good time to update your phone, tablet, or laptop for a newer version.    To be able to depreciate items it doesn’t necessarily need to be paid off, but leasing doesn’t count.  The item needs to be in the business, a personal cell phone isn’t allowed, but a business cell is.  And the life of the item should be more than one year.  For example, a calendar won’t be able to go beyond a year so it is an expense.  A piece of furniture can be used over a longer period of time so why not depreciate it?
  • Time to Hire?  Try hiring a veteran, this will allow the business to utilize the Work Opportunity Credit  Other targeted employees include:
    • Summer youth employee
    • Qualified veterans
    • Long-term family assistance recipient
    • Temporary Assistance for Needy Families
  • Retirement:  Never too early to start planning for retirement.  A tool available to anyone is the myRA retirement.  This is super cool because it costs nothing, and you can fund up to $15,000 into it before rolling those funds over to a Roth IRA.

Estimated Payments:

Technically this is a pay-as-you-go tax system. For the small business owner that means an estimated quarterly payments.  Usually by the 15th of the following months: April, June, September, and January.    Paying too much estimated taxes is an interest fee loan to Uncle Sam.  Paying too little in estimated taxes means extra penalties at tax time.

Tax Planning Time

Tax Planning Time

Is R&D for me?

Research and Development is for business that develop new products or processes.  If there are engineers, product development people, or even scientists on your payroll your business may be eligible.

Here are a few other indicators that your business might be eligible for this awesome credit:

  • Improved process
  • Software development and testing
  • Development of a product
  • Improvement of a product
  • Formula development
  • Inventions

Tax Advisor:

It may be time for a tax advisor, someone that can review the business income and expenses and help develop a plan for the future of the business.  Timing is key when it comes to taxes and an advisor can help keep that business on track.

 

It may be the start of summer, but adding value to your business for years to come means watching out for potential tax savings during the entire calendar year.

 


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Where to find a Withholding Calculator

Did you fill out that W-4 form right?  Will you have enough withholding, owe at tax time, or will you get a huge refund?  A huge refund in’t necessarily a bad thing but it is an interest free loan to Uncle Sam.

What is a Withholding?

You get paid, Uncle Sam takes his cut, that is what withholding is.  Either you pay as you go or you owe a lot at tax time and if you don’t pay as you go then you may owe penalties on top of those taxes!

Have your current pay-stub handy, and your recent tax return, if you don’t have this info and want to estimate it just know that the results are only as accurate as the data entered (remember garbage in = garbage out).

Here is the website for the calculator on withholding.  If the results scare you then you can easily change your withholding by printing a new Form W-4  and submit it to your employer.  Some companies have websites that allow a user to log-into and update the withholding with a click of the mouse.

If you don’t know how to fill it out then you are in the right place because here we go:

The personal allowances worksheet gives you an idea of how many allowances you should be claiming.  Most people write zero  in items A though H to offset any taxes and get a large refund.

If you are married, both spouses work and have kids the calculation can become more complex.

A New Summer Job! Now fill out this W-4

You finally got that summer job and they give you this W-4 Form that they say fill it out, but how?

Ask Mom and Dad?  They don’t know either because they haven’t filled one of those out in years…

Ask the boss?  Well, you just got the job and don’t want to look like an idiot.

Here is how you do it.

We’ll just work from top to bottom front to back.

Personal Allowances Worksheet:

A:  Enter “1” for yourself if yo one else can claim you as a dependent:   Enter 0 (that is a zero) because most likely your parents are claiming you.

B:  Enter “1” if your single and have only one job; or your married, have only one job, and your spouse doesn’t work; or your wages from a second job or your spouses wages are $1,500 or less:  Enter 0 (another zero) 

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Valuable Credits- Savings at Tax Time

Every year millions of dollars go by the waste side.  Why?  Because people don’t know to claim the credits that are available to them on their tax returns.

These are honest tax credits, no trickery here.

Working Families:

Earned Income Tax Credit (Also known at the EITC), this is supposed to help low and moderate income workers and working families.   This means you worked for someone for a wage or independent contractor (you got a 1099-MISC form in the mail).  The IRS offers a cool EITC Assistant to help you see if you qualify.  Check the correct year and have at it.  This is offered in both English and Spanish.

Families with Kids:

Child Tax Credit is available for those with children under the age of 17 (on December 31st).  This credit can be up to a whopping $1,000 per eligible child!  This is not the child care credit or the dependent exemptions.   (more…)