Tuesday, December 17, 2013

Tax Implications for Bloggers

Lynn Stalhvorth, CPA,  & Susan Anderson, CPA, CFP,  for TMC Net write:The popularity and profitability of personal blogs continue to increase with the availability of easy-to-use social media tools, such as Twitter, LiveJoumal, and Tumblr, as well as the shift of more advertising dollars to these blogs. The term "blog" is a contraction of the term "web log." Information or commentary is posted to a blog in discrete entries and presented in chronological order, newest entries first. Blogging's popularity has steadily increased since the late 1990s. Many personal blogs are written solely for their own sake and earn less than $100 annually. While it is impossible to know the total amount of revenue generated by personal blogs, it is estimated that only about 10% of these blogs earn more than $100,000 annually. Approximately 150 million people post to their personal blogs regularly. Chances are that some of these individuals can be found among a tax preparer's clients. This article offers guidance to CPAs who provide tax and business advice to bloggers, large or small, by explaining the relevant tax provisions.

The pitfalls awaiting bloggers who do not think of themselves as business owners present opportunities for CPAs, as suggested by this blogger: I opened an LLC earlier this year. I'm lost with keeping up with all the expenses-money coming in and going out. Some items were paid with my personal account and others with my business account and I have income being deposited to PayPal! Many CPAs might be unfamiliar with personal blogs. Exhibit 1 presents a glossary of commonly used blogging terms. The first personal blogs, such as http://www.peterme.com, were generally online diaries. While the online journal genre of personal blogging is still around, many blogs now focus on a particular subject, such as politics (http:// www.cagle.com), food (http://www. aspicyperspective.com), exercise (http:// www.irunfar.com), personal finance (http://www.moolanomy.com), home improvement and decorating (http://www. digsdigs.com), fashion (http://www. manrepeller.com), travel (http://youngadventuress.com), or sports (http://www. mlbtraderumors.com). In terms of legal structure, most blogs are either de facto sole proprietorships or organized as LLCs.

Personal bloggers are often unaware that they may face any tax issues. Consider the following example: Katherine works in retail and has a personal blog on which she writes about regional travel. She and a friend recently spent a long weekend at a spa in the mountains a few hours away. Katherine plans to write on her personal blog about her spa experience. The spa provided her and her friend several free services and meals. The friends took a day trip to try zip lining and dined at a well-known area restaurant. Katherine has not yet decided whether she will blog about the zip lining; she had planned to review the restaurant on her blog, but the meal was unimpressive, so she changed her mind.

What are Katherine's taxable income and deductible expenses with regard to this trip? Katherine has no idea, and is not even aware that she needs to consider including any of these items on her tax return. Answering these types of questions for taxpayers requires considering whether a blog is a business, and what its revenues and expenses are.

Business or Hobby? As bloggers move into business activities, they would certainly benefit from tax planning and business advice. In anticipation of growth, issues such as deciding how to organize the business and the need to separate living space from office space in order to deduct home office expenses need to be addressed. Bloggers who do not think of themselves as small business owners might not realize that they need to file estimated quarterly tax payments or include income from companies that did not send them a Form 1099. While some bloggers might bristle at the idea that their personal blog is a business, they will likely welcome this guidance. And as CPAs become more familiar with the business aspects of blogging, they will likely recognize the potential for new service opportunities.

The most important consideration in determining the tax consequences of a blog is whether the blog is considered a hobby or business. Exhibit 2 lists the factors that the 1RS considers in classifying an activity as a business or hobby. The intent to make a profit is a crucial factor for the blog to be considered a business. Because many blogs are not started with this intention, but rather evolve into income-generating entities over time, CPAs can help address and overcome the profit-motive hurdle. Blogs that do not generate a profit for three or more years during a five-year period are presumed to not be profit motivated; therefore, they are subject to the hobby loss limitation (Internal Revenue Code [IRC] section 183 [d]). Even if a blog does not have the requisite three years of profits, CPAs can help a blogger demonstrate that the blog is a trade or business. It is important for a blogger to manage all blog-related activities as professionally as possible in order to be considered a business.

If the blog is a considered a hobby, its expenses are deductible only to the extent of its income (IRC section 183 [b] [2]). Hobby expenses are deductible in the following order: 1) interest and taxes related to the hobby (e.g., real property taxes and home mortgage interest that are otherwise deductible); 2) ordinary and necessary hobby expenses, excluding depreciation; and 3) depreciation (Treasury Regulations section 1.183-l[b][l]). Qualifying expenses in the last two categories are also subject to the 2% of adjusted gross income (AGI) floor on miscellaneous itemized deductions (IRC section 67[a]). In contrast, if a blog qualifies as a business, blogging expenses in excess of income can be deducted without limitation.

Blogging Revenues Starting a personal blog can be easy and inexpensive: pick a name; choose one of the various free blogging hosts (or platforms), such as Blogger, WordPress, or Posterous; and start writing. Posting high-quality content and developing loyal readers increase traffic to a blog. At this point, it may be pos sible for this casual hobby to generate an income stream. Many personal bloggers can earn at least small amounts of revenue by hosting some type of advertisement. Personal blogs that host ads are considered "monetized." If the decision is made to monetize, bloggers will have taxable income that needs to be reported, along with documentation of the costs incurred in connection with their blogs.

Monetization of a personal blog can take many forms. Although some sources of blogging revenues are similar to other types of income earned by freelancers or small businesses-for example, consulting or speaking engagements, offering workshops, or selling the business-others are unique to the blogosphere. One of the easiest ways for a blog to earn revenue is to join an advertising program, such as Google's AdSense or Chitika. These programs work by posting ads for products that might interest the blog's readers and then paying the blogger when readers click on the ads.

Another simple way for blogs to generate revenue is through affiliate marketing. Several of the more popular affiliate marketing programs are Link Share, Google's Affiliate Network, and Amazon Associates. Most of these programs are pay-per-sale. If a parenting blogger becomes an Amazon Associate, for example, and includes links to childcare books, strollers, or child-proofing gadgets in the text of a blog entry, the blogger is paid if a reader clicks on the link and buys any of those products from Amazon. Bloggers can also solicit businesses to advertise directly on the site. For example, a regional travel blog could collect fees for hosting ads for area restaurants, inns, and attractions. Offering online or virtual courses, selling e-books, installing donation buttons or "tip jars" and accepting products or services to review are other sources of blogging revenue.

Bloggers should be advised to track these revenues on a monthly basis. They may not realize they will only receive Form 1099s from companies from whom they earn over $600 annually, or that compensation in a form other than cash still represents taxable revenue. In response to recent posts to blogging communities about tax questions, these questions from bloggers drive home the point: I think a lot of people accept free food and products and don't think about that as income. I'd like to hear some discussion on minimum thresholds, too, i.e. you have to make X dollars before you have to claim it on taxes.

If a gift card is given instead of payment, how does that counts towards taxes? Not sure if a company would send a W-2 or not.

It is common practice for advertisers to deposit earnings directly into a blogger's PayPal account. These earnings must be reported as income in the year in which they are constructively received (Treasury Regulations section 1.451-1 [a]), so bloggers should be advised that those earnings are effectively received when deposited, regardless of when they are withdrawn, and note that there is generally a lag between the month in which advertising revenues are earned and that in which they are received.

Bloggers are often compensated in goods and services. For example, a home improvement blogger may receive free copies of decorating books or tools to review. A wine blogger may receive free bottles, complimentary wine tastings, or even trips to visit vineyards. Bloggers who speak at conferences are frequently compensated with conference fees and travel costs in lieu of fees for speaking. When meals, accommodations, and products are received as compensation, bloggers should be advised that the fair value of these items must be included in income (Treasury Regulations section 1.61-1 [a]).

Blogging Expenses Identifying and tracking deductible expenses is an area in which bloggers particularly need guidance, as suggested by the following quotes: I need to know the basics. Been blogging over a year, what should I have been doing or start doing now? Keep all my receipts? Keep a spreadsheet of all my expenses? Can I deduct these expenses? Do you have to have a business to deduct the blog expenses on your taxes? Whaf s the best way to handle groceries [for a food blogger] in terms of separating out what's for business versus personal, and how should we document their usage? Other questions also arise: How much, if any, of her grocery bill can a food blogger deduct if she is developing and posting recipes? Can a sports blogger deduct the costs of season tickets and travel incurred to attend out-of-town basketball games? Can a fitness blogger deduct gym membership fees? Blogging conferences, such as Blog World and Bloggy Boot Camp, are a great way to hone skills and gain exposure for a blog, but they come with conference fees, travel expenses, and dues for professional organizations. What, if any, costs of attending such conferences are deductible? Initially, bloggers might incur costs for professional webpage and logo design, trademark development and registration, advertising, prizes, business cards, head shots and letterhead. While it is possible to start a blog without incurring any costs, many personal bloggers choose to register their domain names with a registrar (e.g., http://www.GoDaddy.com) for an annual fee. A blog that owns its domain can be distinguished from one that does not by the absence of the blog host's name in the blog's web address. For example, http://www.anothermarvelousmeal.blogspot .com is the web address for a personal blog hosted by Blogger, for which the author does not own the domain, whereashttp://www.anothermarvelousmeal.com is the address for the same blog with a registered domain name. Registration of a domain name makes the blog easier to find because the web address is usually the same as the name of the blog. Registering the domain name gives ownership of the name to the blogger and allows for flexibility to move between hosting platforms.

Recurring costs for bloggers include expenses for blog- and photo-hosting sites, cloud access, search engine optimization, and other types of consulting. Bloggers incur typical business expenses, such as office supplies, mailing expenses, legal and accounting services, word processing, and other types of software. A computer and peripheral equipment, such as a printer, are necessary expenditures. Images are an important component of most types of blogs, so a digital camera, photo editing software, lighting, and other related equipment are generally needed. Many blogs are written from home, so a deduction for home office expenses is also a possibility. While it is relatively easy to track and determine the amount deductible for tax purposes for some of these expenses, the deductibility of other items is mysterious to many bloggers, assuming that they even realize a deduction is possible.

In order for an expense to be deductible, it must originate in an income-producing activity (U.S. v. Gilmore, 372 US 39 [1963]). Bloggers can deduct ordinary and necessary expenses incurred in the production of income (IRC section 212[1]). The definition of "ordinary and necessary" differs depending upon the subject matter of the blog. The courts consider the facts of each case when determining whether an expense is ordinary and necessary. Although workout costs are usually personal and not deductible, off-season physical conditioning costs were determined to be ordinary and necessary business expenses for a professional hockey player (Stemkowski v. Comm 'r, 690 F2d 40, 1982-2 USTC para. 9,589 [2d Cir.]) and may be considered such for a fitness blogger if the workouts are the basis for blog posts and the blog qualifies as a trade or business.

Similar guidance exists for entertainment: the regulations contain an objective test for classifying these costs (Treasury Regulations section 1. 274-2[b][ii]). For example, attendance at the theater by a theater critic is not entertainment, but workrelated. A sports blogger's season tickets are deductible as well. A food blogger can deduct the costs of food purchased to test a recipe, but must reduce the deduction by 50% (IRC section 274[n][l]). Transportation costs (e.g., air travel) are deductible if the majority of the time on the trip is related to the blogging activity (Treasury Regulations section 1.1622[b][l]). All of these bloggers can deduct blogging conference fees, as well as 50% of the cost of meals and lodging during the conference. If bloggers receive complementary registration and accommodations at a conference in exchange for speaking, the fair market value of these items would both be included in income and potentially deductible as an expense, subject to the hobby limitations if the blog is not a trade or business. Similarly, if a blogger receives complimentary merchandise from a manufacturer to review or use as a prize in a contest, the fair market value of the merchandise is both includible in income and deductible as an expense, subject to limitations.

If a blog is classified for tax purposes as a business, a blogger can elect under IRC section 179 to expense equipment such as computers and cell phones. For 2013, the maximum deduction is $500,000 (IRC section 179[b][l][B]). Most bloggers will be subject to the provision limiting the deduction to the blog's taxable income (IRC section 179[b][3][A]). The IRC section 179 deduction is not available for hobbies, so blogs classified as hobbies for tax purposes must depreciate these assets over their class lives. Computers and peripheral equipment are classified as five-year Modified Accelerated Cost Recovery System (MACRS) property (IRC section 168[e][3][B]), whereas cameras and cell phones have a class life of seven years (IRC section 168[e][3][C][v][II]). In order to depreciate computers, cameras, and peripheral equipment (e.g., "listed property"), the blogger must keep logs showing the amount of time the property is used for blogging versus personal purposes (Treasury Regulations section 1. 2745T[6][c]).

Depreciation deductions are prorated based upon the percentage of blogging use. In the case of listed property used for blogging, less than 50% of the total use must be depreciated under the alternative depreciation system (ADS) under IRC section 280F(b)(l). The ADS uses the straight-line method and does not permit bonus depreciation (IRC section 168[k][2][D][i][II]). If listed property was previously depreciated under MACRS and the business use drops to 50% or less, the excess depreciation deduction (including excess IRC section 179 deductions) must be recaptured as gross income (IRC sections 280F[b][2] and 179[d][10]; Treasury Regulations section 1.179-1 [e]). Over-the-counter computer software is amortized over 36 months beginning with the month in which the software is placed in service (Revenue Procedure 2000-50).

For a blogger to deduct home office expenses, a portion of the home must be used exclusively on a regular basis as- * a principal place of business for any trade or business of the taxpayer, or * a place of business that is used by patients, clients, or customers in meeting or dealing with a taxpayer's trade or business (IRC section 280A[c]).

The "exclusive use" requirement means that the portion of the home must be used solely for the blogging activity. For example, a food blogger will not be able to deduct costs associated with his home's kitchen, because it is also used to prepare meals for personal consumption. A principal place of business is an office used by the taxpayer to conduct administrative or management activities pertaining to the trade or business, when there is no fixed other location of the trade or business where the taxpayer conducts substantial administrative or management activities (IRC section 280A[c][l]). For example, if a sports blogger has a room with a computer and television that are used only for her blogging activities, the room would qualify as a home office. If the blogger obtains Internet access through a telephone company, the cost is not deductible, unless there is a separate line devoted to the blogging activity and not used for other purposes. If Internet access is through a cable provider, the cost is not deductible if used for personal purposes in addition to blogging.

The deduction for home office expenses is limited to the income from the blogging business, reduced by the allocable portion of otherwise deductible interest and taxes, and any expenses not related to the use of the home, such as advertising, supplies, and incidentals (IRC section 280A[c][5]). In determining the amount of expenses to allocate to the home office, taxpayers typically use the ratio of the square footage of the home office to the total square footage of the home.

In January 2013, however, the 1RS issued Revenue Procedure 2013-13, which provides an optional safe harbor for calculating the amount of deductible expenses attributable to the business use of a personal residence. This safe harbor, effective for tax years beginning after December 31, 2012, allows taxpayers to deduct $5 per square foot for home office expenses, up to a maximum of 300 square feet. This amount represents all expenses pertaining to the home office, except for otherwise deductible interest and taxes. The safe harbor election is made annually, but once it is chosen for a particular year, it is irrevocable. Depreciation on the home office is not deductible in years in which the safe harbor is elected. If, in subsequent years, the actual expense method is used, the home office must be depreciated under ADS.

It is critical that bloggers maintain adequate substantiation for all deductions. This documentation should include the amount, date, time, place, and business purpose for the expenditure. If the expense is for entertainment, the substantiation should also include the business relationship to the person being entertained (IRC section 274[d]).

Opportunities Serving bloggers is a great opportunity for tax advisors to expand their practices. As blogs continue to proliferate, tax professionals will increasingly be asked questions related to the specific issues that bloggers face. For many bloggers, these questions may involve relatively small amounts of money. Few blogs become "overnight successes," and it is hard to predict which will become big money makers. But at any time, the right sort of recognition-an award, a post that goes viral, a mention in a national newspaper story-can have a huge impact on a blog's popularity and profitability, turning a relatively small income stream into a much larger one. More commonly, blogs may become successful enough over time to provide a substantial second income. Bloggers and their CPAs need to understand the unique tax issues before the activity becomes lucrative. CPAs can start by advising clients who blog on the importance of establishing good record keeping from the outset. ? Personal bloggers are often unaware that they may face any tax issues.

If a blogger receives complimentary merchandise to review or use as a prize In a contest, the fair market value is both includible in income and deductible as an expense, subject to limitations.

Lynn Stalhvorth, CPA, is an associate professor of accounting at Appalachian State University, Boone, N.C. She also publishes a food blog at http://www.Carolina bonvivant.com. Susan Anderson, CPA, CFP, is a professor of accounting, also at Appalachian State University.


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