With the year coming to a close, those bloggers who earn revenue from their sites may want to think about tax implications. Brian Borawski, who writes the business pieces for the Hardball Times as well as his own blog (Tigerblog), is an accountant by day. Brian generously agreed to answer some questions related to blogging income and taxes.
Before we get started, it is important to emphasize the following:
The topics in this column are for informational purposes only. It is imperative that you consult with your tax advisor with regard to your unique situation before implementing anything found in this column.
BaseBlogging: What income do bloggers have to report?
Brian: Technically, anything they receive should be considered income for tax purposes, no matter how small. Whether it’s $10 or $10,000, the Internal Revenue Service (IRS) considers it income and it should be reported on your tax return.
BaseBlogging: What are the business structures that bloggers should consider?
Brian:The easiest structure is a sole proprietorship, and in this event they basically do nothing. All of their income and expenses are reported on Schedule C of their Form 1040. This is probably the recommended version if the blogger is making a small amount of money from their blog. Once you get into the thousands of dollars and especially if you have a network or several people writing for you, it might be time to put something a little more formal into place.
One option is a Limited Liability Company (LLC) and these have become pretty popular. They’re less administratively burdensome then a corporation (which we’ll get too) and they’re usually easier to set up. A single member LLC would be set up if there’s only a single/owner member while a multi-member LLC would be set up if there’s more then one owner.
A single member LLC is taxed the same as if you were a sole proprietorship and all of the income and deductions are reported on Schedule C of your Form 1040. A multi-member LLC is required to file the same return that partnership would, Form 1065, with the income and expenses eventually “flowing” to Schedule E of their Form 1040.
Another option would be to incorporate. While there are distinct benefits to incorporating, this is the most administratively burdensome of available entities. This form of entity would be preferred if you have a large network of writers that write, but only a small number of owners. One of the burdens of a corporation is that the owners have to be on the payroll, so if you have a corporation owned by one person, they’d have to go through the process of keeping payroll records and filing payroll tax returns with the IRS and their respective state. Another burden is that the corporation needs a formal board of directors, which requires board meetings and minutes from those meetings. Some states let you have a one person (usually the owner) board, so that makes it somewhat easier.
There are two types of corporations as well. The S Corporation is pretty popular because you avoid double taxation on the income of the corporation because it doesn’t pay an entity level tax. So similar to a partnership, the income gets recorded on your Form 1040 and is taxed at your own marginal tax rate. However, to qualify as an S Corporation, you have to make a proper and timely election.
The C Corporation has some distinct benefits as well, although it has its own pitfalls. A C Corporation pays an entity level tax so the corporation has to actually cut a check to the IRS (assuming it makes money). One nice thing is the first $50,000 in net income is taxes at 15%, so if you’re in the 25% tax bracket on your Form 1040, there’s some savings there. The problem is, if you pull the money out as a dividend, you’re tax again so this might no make as much sense if you’re basically going to funnel all of the money from your corporation into your personal finances.
The other thing to keep in mind is to respect the entity. If you have an LLC or a corporation, you’ll need to set up a separate bank account and the business’ funds should not be commingled with your personal funds.
BaseBlogging:If blogging is a business, what types of expenses would I be able to deduct?
Brian:The general rule for a valid deduction is that it has to be ordinary and necessary. I know this sounds pretty grey, but unfortunately it is. Things like baseball books, publications and annuals would definitely be valid deductions. If you have MLB Extra Innings, then that would probably qualify as well, as would MLB TV on MLB.com although here we’re getting into the grey area. XM radio, which now has audio feeds of most MLB games, could also be considered a business deduction.
Your internet connection might be a stretch unless you honestly use the internet almost exclusively for your blog. Along the same lines would be your PC. If you’re using it for more then 50% business, then you’d be able to take some depreciation expense but the ideal situation would be if you have two computers, and one you’re set up exclusively for blogging. Then you’d better be able to document that the computer was used strictly for business purposes.
Another stretch would be actually tickets to the game. While you could justify deducting the ticket, it would only be yours. If you and your three friends went (or you and your family), then the IRS would probably deem that was a personal trip.
The other thing to keep in mind is what the IRS calls “Hobby Loss Rules.” I’m sure most people who make incidental income from their blogs would be able to find way more in deductions then they’re making in income. Those losses are valid and can be rolled into your Form 1040, however, the IRS has certain rules they require you to follow to ensure you’re not just turning a hobby into a tax deduction. One general rule that the IRS uses is that the business must have income of two of the last seven years. Keep in mind that while meeting this rule helps, it doesn’t completely absolve you of the hobby loss rules. So say you had thousand dollar losses in five years and minimal income in two years, the IRS might still deem that you’re basically playing games and disallow your losses.
If you’re not sure, then it’s probably a hobby. And while you can still take deductions, you just won’t be able to deduct more then what you made in income throughout the year.
BaseBlogging:What are some options for multi-author blogs?
Brian: It depends on how the network is set up. If it’s a small group of basically “equal” bloggers that have decided to set up shop under one site, then a multi-member LLC might be the way to go. The one thing to be careful of is the deductions. If one person is having the LLC pay for their MLB Extra Innings, then that cost is spread to the other owners (as is the tax deduction). Another option would be to establish one, two or a handful of people to be the owners, who then pay the other bloggers based on a fee structure. You can also do either option as a corporation as well.
If there’s no formal entity set up and the bloggers are sharing in the profits, then they’ve basically set up a simple partnership, even though they didn’t file anything with their respective state. In this event, a partnership return (Form 1065) would be required.
BaseBlogging:With the year ending, is there anything that bloggers should do to prepare from a tax perspective?
Brian:The biggest thing is to get organized. Put together a quick spreadsheet showing the cash you’ve brought in and start documenting your deductions. You should also have a copy of the receipt for your purchase (whether it’s a book, an internet bill, or your ticket stub) as backup. If you’re operating as an LLC or a corporation, then you should be keeping a formal set of books to document your income and expenses.
The other thing I’d recommend is to contact a professional. If you have any questions, you can feel free to contact me at firstname.lastname@example.org and I’ll try to help you out as best I can.
I’d like to thank Brian for taking the time to answer these questions. I approached Brian for this because a)he’s an accountant, b)he’s a blogger, and c)he’s been my accountant for the last several years. If you have any questions, feel free to email Brian. If it is something you think others might want to know leave it in the comments or submit it via the contact form.