We don't want the IRS mad at us.
January 4, 2006 8:48 PM   Subscribe

We have a couple of blogs and use a combination of Google Ads, AdBrite and Amazon Associates placements on them. We're trying to figure out how best to approach the income from these ads on our tax filings...

We never thought we'd be making as much as we are making (which still isn't much...not enough to live on), so we hadn't really thought through the tax implications in advance. We were blogging for fun and then...well, income.

Since our Google Ads income exceeded 4 figures this year, we think that we probably have to cover our bases on our upcoming tax return. (More than $7500, less than $10k). Our other income sources posted more modest returns (Amazon, $500+; AdBrite: $500+). To facilitate our blogging, we purchased domain names, paid for hosting services, attended a conference, bought a digital camera, etc. Are these officially expenses?

Also, we'll probably get paperwork from Google for filing with our tax return, but can't imagine that Amazon or AdBrite are going to send us something for those amounts...are we wrong?

I'm a temp and my spouse works full-time so we really don't have experience with this little "side business" situation. Any suggestions for where to research this? Any other folks out there dealing with a similar situation? We are not incorporated or anything "official" like that. Just two regular folks with a laptop who are passionate about the subject we write about.

We talked about hiring a CPA but we've been told that may cost us close to $200-300. Since we're already going to owe the IRS this year, we'd rather try to do this ourselves with Quicken/Turbo Tax. We just don't know how to categorize this unexpected income. Thoughts?
posted by anonymous to Work & Money (20 answers total)
Amazon is pretty sharp about 1099ing you I've found. I suspect the AdBrite people will do the same thing, since they have to pay tax on all their profits from advertisers.

The last time I used an accountant, it was about $500 and they didn't save me any money from what I expected to owe. Since then, I've just stuck with TurboTax Online, and been fine with that.

I would say that all your expenses count against your profits. Be sure to have receipts for it all and be realistic about your costs of doing business.
posted by mathowie at 9:09 PM on January 4, 2006

I think that the camera will probably have to be amortized over 5 years instead of being able to count all of the cost against this years income.

But for sure all of that stuff - the conference (and all associated travel and lodging), the domains, your internet access, your computer and peripheries, books or magazines you may have purchased, i.e. EVERYTHING related to the way you made this income (think hard) can be counted against this income.

(This is, assuming that you will itemize. If you take the standard deductions -- which might work out better for you if you don't have a high mortgage payment or make hefty charitable donations -- then I'm pretty sure that these expenses will not help you.)
posted by visual mechanic at 10:16 PM on January 4, 2006

Because you're new to the "side business" business, you should hire a good tax person. This person will teach you what you can expense, how you should file your taxes, and will probably save you more than $200-300 in the long run.

Then, next year, after you've been trained by your tax person, you can use TurboTax or whatever.
posted by lunarboy at 10:43 PM on January 4, 2006

I've always wondered, and I'm totally in what-if territory, but if you claimed everything against some income a blog makes, couldn't you just start a car blog and write off your car payments as an expense? And start a house blog to write off mortgage payments? Linux blog to write off a new server? etc, etc, etc.
posted by mathowie at 10:51 PM on January 4, 2006

mathowie, generally you have to not have a "hobby business". One of the things the look for is turning a profit for 3 of the last 5 years. So they're not entirely blind to the possibility.
posted by RikiTikiTavi at 11:04 PM on January 4, 2006

If you formed a business and the business legally owns the car and the car is used exclusively for the business.... then maybe you could do some shenanigans with it - but you'd get audited pretty quickly.
A lot of MLM companies try to sell their "opportunities" by advocating tax scamming. They'll tell you that you can form a corporation around your MLM business, put everything in it's name and write off vacations in hawaii, house payments, new clothes, expensive watches, etc. The Rich Dad guy tries to claim that too in his factually challenged books. I think there's a whole lot of heavy tax liens across the country that these guys are responsible for.
posted by muddylemon at 11:05 PM on January 4, 2006

My suggestion for the original poster, in 2006, is to talk to an accountant about retirement plans.

With the blog as a business, you should be able to make a few business expenses throughout the year (tax-free, of course), then put the entirety of the corporate profits into retirement plans, also pre-tax.

If you don't need the money now, I'd refrain from taking any "salary" at all.
posted by I Love Tacos at 11:19 PM on January 4, 2006

One other note. If you support any charities, you can probably give to the charity in your website's name, and file it as corporate promotion. (I know you can do this within a real corporation). A handy boost to your charitable giving power.

The Rich Dad guy tries to claim that too in his factually challenged books

I just noticed this response and wanted to concur. These books are full of absolutely terrible advice. Much of the advice is not just bad for your wallet, it's flat out illegal.

When the hype was out about these books, I gave them a read, and was just saddened when I saw them remaining on the best seller shelves. He advocates insider trading, and gives a ton of terrible advice. Unfortunately, Joe Public doesn't have any way to tell which is real and which is awful (except to consult a financial professional, who will tell them to burn the book.)
posted by I Love Tacos at 12:06 AM on January 5, 2006

Also (and this is solely my experience) if you don't have documentation for your expenses you're probably better off taking a standard deduction. I was surprised when I tried to itemize and couldn't beat the standard deduction, even with a box full of expenses. Let's say the conference and related expenses was $500, the camera was $500, the domains were $200, hosting was $40/month. Let's throw in another two grand for related expenses. That's $3680, which isn't even close to $5000, the lowest standard deduction.

"Also, we'll probably get paperwork from Google for filing with our tax return, but can't imagine that Amazon or AdBrite are going to send us something for those amounts...are we wrong?"

It's your duty to document your income. Maybe you'll get tax documents, maybe you won't.
posted by raaka at 2:54 AM on January 5, 2006

Actually, you may not get a 1099 for anything under $1000 - I've been told more than once in the past that you don't have to report 1099 income under $1000, but I cannot seem to dig up the rule at the moment, and my CPA stepfather is not available to answer immediately.

A "safe" rule of thumb with income like that, put 30% aside in a savings account or something, and at the end of the year, when filing taxes, you've got that 30% sitting there to cover any tax liability you have.
posted by TeamBilly at 5:48 AM on January 5, 2006

IANAL, IANAA (I am not a lawyer/accountant) If you have a legitimate business, which you do, expenses for that business are deductible. Hosting, conferences (including mileage), etc. are all genuine expenses, and may be deducted. Significant expenses, like a $20,000 computer, might need to be depreciated over a span of several years.

I think you'd be well served by a good accountant. I used to own a small business and a bad accountant was very expensive; a good accountant was very valuable, and you can't tell by the way they charge. Ask small business owners, like your garage or massage therapist for recommendations.

Matt, if the PVR blog makes money, your Tivo costs are probably at least partly deductible.
posted by theora55 at 6:46 AM on January 5, 2006

You'll probably need to file a schedule c. The form suggest a good start to organizing your bookkeeping.
posted by theora55 at 7:08 AM on January 5, 2006

My rule is, if you spend more than 20 minutes on your taxes you should get an accountant. When I think of all the weekends I wasted and the sleepless nights doing my own taxes, I kick myself for not getting a CPA sooner.

The accountant will probably save you more money than their fees. Plus the accountant fees are deductible the following year. Even if not, the peace of mind is worth something.

If you're making $10k a year beyond your normal income it may also be worth finding a fee based financial adviser. They aren't cheap either (~$175/hr) but can help you make some good decisions on how best to take advantage of this extra income.
posted by deanj at 8:01 AM on January 5, 2006

I get 1099-INT forms for everything that earns a dollar of interest, it seems. Are there different rules if it's not interest?
posted by smackfu at 8:07 AM on January 5, 2006

Another note - make sure you're not running Adbrite ads on the same page as Google ads - Google's T&C prohibits this...

I've been making money off Adsense ads for the past couple of years, and I just get the 1099s and claim them as income from part of my consulting business.
posted by mrbill at 8:35 AM on January 5, 2006

To answer the original question:

Call your local offices of the Small Business Administration (SBA), and the Service Corps of Retired Executives (SCORE). They often have free tax help sessions for entrepreneurs this time of year.
posted by peppermint22 at 8:52 AM on January 5, 2006

I was surprised when I tried to itemize and couldn't beat the standard deduction ... That's $3680, which isn't even close to $5000, the lowest standard deduction.

I think there is confusion here:

* The standard deduction is an alternative to itemizing expenditures such as charitable deductions, mortgage interest, and state income taxes.

* If you have a business with income (rental property is the most common situation), then you can deduct related expenses (for example, property taxes and repair costs) from that income. You do this on a schedule C (see posting above for the link).

For blogging income, the Schedule C is the right place to work from. [And, in my opinion, a version of TurboTax or other software that helps fill out this schedule is BETTER than going to a tax professional, unless you encounter (a) something that the software doesn't adequately explain, and (b) which is more than a hundred or two hundred dollars of potential deduction.]
posted by WestCoaster at 9:54 AM on January 5, 2006

Another vote for "talk to an accountant." You don't need to hire them to do your taxes for you, but booking a one-hour consultation where you can ask these questions and get detailed answers specific to your circumstances will be money very well spent.
posted by winston at 11:17 AM on January 5, 2006

TeamBilly, it's actually $600, not a thousand. Anything over $600 should be sent a 1099.
posted by mathowie at 11:41 AM on January 5, 2006

Schedule C. [fill-in pdf] [instructions] You don't need to formally register for a Tax ID, have a separate bank account, or anything special, and I wouldn't bother for less than $10K. You can also file a C-EZ for certain very simple situations (e.g. less than $5K income), although tax software will do this for you automatically if you qualify.

I also would not bother with an accountant for a business that is just a little income and no real assets. Most of your questions can be answered by reading the appropriate IRS manuals -- like Pub. 334 [pdf].

Basically: Income will be 1099s and "other sources".
Expenses are any legitimate expenses incurred, which should not be hard to document (a credit card receipt will do). Domain name? Yes. Hosting? Yes.

Travel expenses are a little trickier. I assume they're well under the business income, so they won't put you into the loss category. Most expenses will be deductible
But these will go on Schedule C and directly reduce your taxable profit.

The digital camera is trickier yet. You will need to depreciate it using Form 4562, but there is a rule -- Section 179 -- that allows you to immediately deduct up to a certain amount in the first year of a purchase. Section 179 is not always the best -- if you expect your income from the business to increase, you will want to depreciate so that you take the tax benefit in more years. Note: you should guesstimate, at least, the percentage of business use (100% seems unlikely), and use that to peg your depreciation.

For mathowie: A car wouldn't be deemed a justifiable expense just for running a blog about cars. (Nor would buying a PVR for a PVRblog ...) You would have to have a specific business use for the car or other expensable item. That business use would have to be measured against any other usage. Reviewing a PVR would count, but using it the rest of the year just for yourself wouldn't!

if you don't have documentation for your expenses you're probably better off taking a standard deduction

There is no standard deduction on Schedule C, but you'd better have decent documentation.

By the way, WestCoaster cites rental income, but that's Schedule E, not Schedule C -- since rental property is generally deemed a passive business activity, like receiving royalties.

The only other caveat I would keep in mind is that businesses are required to pay taxes in quarterly installments, in many situations [guidelines For $10K income, though, on top of two full-time incomes you will likely be OK, and if not, the penalties aren't great at this level. Just pay attention to your AGI (coming year as well as just closed) and you should be within the guidelines. You can always pay something in the final quarter if your income increases.
posted by dhartung at 1:47 AM on January 6, 2006 [1 favorite]

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