• Current Giveaways

  • join the WiC Chicks

    The WiC Chicks (or Chucks) Review Program)
  • Save and Make Moola
  • There’s been a lot of questions percolating around the blogosphere about taxes and how it affects bloggers who receive products to review on their site. My interest was further intrigued when Jennifer over at www.jleighdesignz.com told me she’d talked to three accountants and none of them had an idea on how to account for this type of situation. Today, I decided to talk to the source and spent about an hour on the phone with the IRS during my lunch break. Here are the conclusions that I came to. Please note that this is my non-professional understanding of the IRS rules as explained to me by two separate gentlemen (one for personal taxes, one for business taxes.) It’s how I plan to file my taxes, but my opinion isn’t a substitute for a professional’s opinion. I’d actually recommend calling the IRS yourself because I found the experience to be very helpful and well worth the call.

    Essentially, the taxes could break down into two different ways – as a hobby or as a business. Each has their own differences which I will attempt to breakdown here. Also remember that these apply to US citizens.

    Scenario 1: Blogging as a Hobby

    First things first – YES YOU HAVE TO REPORT THE FAIR MARKET VALUE OF THAT PRODUCT AS INCOME. You would report this as “Other Income” on line 21 of your Form 1040, Schedule C. (See www.irs.gov FS-2007-26, November 2007.) Receiving products and then blogging about them is considered a barter (this is my opinion) where they are providing you with a product in exchange for a service (which is your review, online exposure, marketing etc.)

    While most people are aware they must include wages, salaries, interest, dividends, tips and commissions as income on their tax returns, many don’t realize that they must also report most other income, such as:

    • cash earned from side jobs,
    • barter exchanges of goods or services,
    • awards, prizes, contest winnings and
    • gambling proceeds.

    and

    Bartering is an exchange of property or services. The fair market value of goods and services exchanged is fully taxable and must be included on Form 1040 in the income of both parties.

    Now, the guy at the IRS that I spoke to said that if you do not continue to use the products you receive in your personal life (ie you test it and never use it again) then you do NOT need to report it as income. However I was not able to find anything to support that, so do it at your own risk if that’s the route you choose.

    Next, you have to determine whether your hobby is for profit. There are a couple of factors to consider to help determine that, such as amount of time spent on the hobby, do you depend on the income, have you made a profit previously. It’s important to determine if your hobby (blog) is for-profit, or not for-profit because that affects whether or not you are able to deduct expenses related to the blog.

    If your activity is not carried on for profit, allowable deductions cannot exceed the gross receipts for the activity. If you are conducting a trade or business you may deduct your ordinary and necessary expenses. – www.irs.gov Summertime Tax Tip 2009-18

    If your blog is not for-profit, then you cannot take deductions for expenses that are MORE than your hobby’s income. So if your income (remember that this includes the value of the products you received) was $500, then you cannot deduct hobby expenses more than $500. Internal Revenue Code Section 183 (Activities Not Engaged in for Profit) describes the expenses that you are allowed to take with regards to your hobby:

    If your activity is not carried on for profit, allowable deductions cannot exceed the gross receipts for the activity.

    Deductions for hobby activities are claimed as itemized deductions on Schedule A, Form 1040. These deductions must be taken in the following order and only to the extent stated in each of three categories:

    • Deductions that a taxpayer may claim for certain personal expenses, such as home mortgage interest and taxes, may be taken in full.
    • Deductions that don’t result in an adjustment to the basis of property, such as advertising, insurance premiums and wages, may be taken next, to the extent gross income for the activity is more than the deductions from the first category.
    • Deductions that reduce the basis of property, such as depreciation and amortization, are taken last, but only to the extent gross income for the activity is more than the deductions taken in the first two categories. – www.irs.gov FS-2008-23, June 2008

    If your blog is for-profit, then you’ll want to refer to my next scenario.

    In summary, my interpretation is that if blogging is a hobby, then you should report the fair market value of all the products and services you received as “other income.” You can also report expenses related to the hobby (such as a percentage of your internet that is used for business, cost of shipping prizes, business expenses related to running the blog) up to the amount of income you received from the hobby (not your total income.)

    Scenario #2: Blogging as a Business

    If you run your blog as part of a business, then YES YOU HAVE TO REPORT THE FAIR MARKET VALUE OF THAT PRODUCT AS INCOME. Sorry, there really doesn’t seem to be any way around it. Again, my interpretation of what my blog does is bartering, and in this case IRS Publication 525, page 19 tells me that:

    Bartering is an exchange of property or services. You must include in your income, at the time received, the fair market value of property or services you receive in bartering.

    Since I’m set up as an LLC, any products that I receive to write reviews on are considered income to my business, for which I am providing a service in return.

    Doing expenses for your business is a little bit trickier. In essence, when forming a business, the IRS expects you to be profitable for three out of five years. If you are NOT profitable for three out of five years, then the IRS can come back to you and disallow your previous losses that were above your income (from the blog/activity/hobby not your TOTAL income) for that year. So if I claim a $200 loss in one year, and show no profit in 3 out of 5 years, then the IRS can come back to me and say, “Nuh-uh…you can’t claim that loss so now you have to pay taxes.” There are a couple ways to deal with this. One is to file Form 5213 which is a request to extend the date to determine whether or not the activity is for profit by an additional 2 years. (You can do this proactively and file it now or within 60 days after the IRS first contacts you about potential issues.) The second is to refer back to those lists of whether or not the hobby is profitable, and use that to justify the expenses that you incurred.

    The rule of thumb for whether or not you can claim an item as an expense is to ask yourself if the expense is “ordinary and necessary for business.” To find more information on what items you can claim as business expenses, you’ll want to check out IRS Publication 535 and Publication 334.

    My understanding is that if blogging is part of a business, then you should report the fair market value of all goods received as business income. You can claim expenses incurred due to blogging and writing the reviews as business expenses, but if your business does not show a profit in three out of five years, then the IRS may disallow those expenses so you’ll want to make sure you a) turn a profit; b) file an extension to buy you more time to turn a profit; or c) make sure you can explain why you aren’t profitable yet using the guidelines provided.

    So that’s it! I hope what I learned from the IRS will help you as much as it helped me. If you have more to add or share, please feel free to comment or correct!

    27 Comments so far. Please add yours!

    • TheInquisitiveMom says:

      Thanks so much for sharing this valuable info! I will pass it onto my accountant (aka my father in-law). :0)

    • Theresa111 says:

      Glad you were on the phone with them and not I. You have substantive information here which I think is quite valuable to the blogging community. Great post and thanks for your efforts!

    • ajpassey says:

      That was so informative! I'll have to look into my situation and see. I think I'll be a hobby till I actually have a profit and then maybe switch! Now to find all the values of the products I reviewed… Okay, there weren't that many.

    • Susanna says:

      Wow. This was the best “IRS read” I've ever laid my eyes on…which usually role to the back of my head and that generally, concludes reading about taxes. LOL
      Thanks

    • Carrie Isaac says:

      I've never talked to the IRS but assumed what you confirmed – that you have to report receipt of goods as income. This is why I don't do a lot of reviews or giveaways, and recently decided to charge for both, even though I know a lot of bloggers do them for the product only.

      I don't want or need a lot of the products that I could receive as a giveaway or review item, and have no desire to pay taxes on them. So, I don't do many and those that I do, I either charge or make sure it's something I really want or need.

    • Thanks for making the call; this info is very helpful. Did you have a chance to ask about products received simply to give away (not to keep for review or personal use)? I'm assuming that because you're not the end-user, you don't have to claim such items? It is technically the responsibility of the winner to claim the fair market value of the prize as “Winnings” as you would any game show prize or gambling winnings?

    • WCatDD says:

      Hi Gina,

      I did ask about promotional items. They said that you don't have to claim giveaway prizes as income and that you can claim the cost of mailing the prize yourself as an expense.

      Thanks for visiting!

    • Does the following sentence only refer to blogging as a hobby, or also as a business?

      “Now, the guy at the IRS that I spoke to said that if you do not continue to use the products you receive in your personal life (ie you test it and never use it again) then you do NOT need to report it as income.”

      I ask because I received several products for my Holiday Gift Guide that I just used once and thought it was a great idea, but will not use it again.

      Also, I did find out from a couple of accountants that you do not have to claim any products received that are consumable. So if you received, say, a box of chocolate to review then you wouldn't have to claim it.

    • WCatDD says:

      Hi Rachel,I believe he was referring to blogging as a hobby, but as I mentioned, I wasn't able to find anything to verify that statement.I did not know about the consumable product exemption – did any of the accountants have a document reference they could provide? If that's true, maybe I should limit all of my reviews to FOOD! Wouldn't that be delicious. :)

    • Missyingling says:

      thank you so much for this…..just wondering if I have to say anything to my accountant…I am blogging for a hobby and I do not receive any money from ads or sponsering. I have only done reviews and giveaways and they only add up to $250.00. Do I have to say anything? I heard you don’t have to pay taxes on anything unless it is over $600?

      • Miriam T. says:

        Hiya Missy – If you’re already paying an accountant, then I would recommend that you at least ask them. They’ll be able to determine if your income should be reported.

        When I spoke to the IRS, they didn’t say that you didn’t have to if it was under $600, although I’ve heard that as well.

    • Thank you for sharing this. It is very helpful.

    • Momvstheboys says:

      good info, I wish someone would explain it on the Canadian side,

    • under $600 in TOTALITY meaning that in total your blog has not rec’ved GOODS / SERVICES AND MONIES TOTALING $600
      a business MUST 1099 you if they are writing off anything over $600 ……..
      they can and do write off the smaller expenses too……… its “on you” to claim it ALL , even a magnet…………the company IS WRITING IT OFF
      the only thing you don’t have to pay taxes on in America that you “get” is a REBATE because you have already paid taxes once. Other than that you are obligated to pay taxes on ALL INCOME regardless of how it appears: GOODS SERVICES AND IN KIND
      its a checks and balances
      it is NOT FREE for the company as in “free advertising” they PAY for the product, shipping, packaging, employees to manifest etc and TRUST ME they write it ALL OFF………..its on you to claim it!

    • Jeff says:

      I have to argue about this on the barter system, if you barter both parties have to report the barter but when you receive products for review both parties are not reporting this.

      Receiving products for review is not considered barter according to the way the tax is written up. You need to report a barter and have both sides giving up something of value and both need to be able to report this value. What value does the company give for your side of it, how much is the advertising worth to the company? I think this would not work if the the government was going to try and get back taxes on stuff you did not report as received for blogging. How much do they consider your writing worth to the company and how do they even this out for both sides.

      I just don’t see how the government could possibly go after you with some kind of definite value for your writing, they have to use both sides of their barter situation and one side is not going to be available easily to them when the company sending the products is not telling the government they are sending it to you.

    • heather burdett says:

      I just won a few small items via blog giveways. While I do not use my blog or earn money from it, I did win a few items. The most expensive of these items was a $250 Food processor and a $64 watch necklace. My biggest question is, since all I ever gave was my name and address, should I recieve a form. Shoudl I just guess at the earnings and claim it? Do I have to claim it at all or is there a value amount threshold?

      • Miriam says:

        I believe that prizes must be claimed as miscellaneous income on your 1040:

        “Prizes and awards

        Subject to certain exceptions, the cash value of prizes or awards won in a drawing, quiz show program, beauty contest, or other event, must be included on the tax return as taxable income.

        Taxpayers must also report the fair market value of merchandise or products won as a prize or award, as taxable income.”

        http://www.irs.gov/newsroom/article/0,,id=175963,00.html

    • Jnuts says:

      I’m wondering how you would verify that you never use the product after the review? I wish we could get some kind of confirmation on that statement from the IRS. For instance, providing evidence of destroying the item I would think should work.

    • Bonnie says:

      Thank you for making the call and sharing what you gleaned from the IRS. :-)

      I’m new to receiving items to review. Thank goodness I didn’t receive many in 2011.

      One box of goodies was from a company called Influenster. They send a box of various goodies, to try and review about, to their members. I became a member in November and received my first box around Christmas.

      It would be lovely, if companies would include a document telling the values of the items they wish to have reviewed. However, in my personal experience, I haven’t received such a document. Therefore, I will need to look up the values of the items I was sent to review.

      Do y’all just make a Word document or spreadsheet to keep track of such things and then enter that information on the appropriate line when doing taxes? I’m just wondering if the self-made document or spreadsheet would be acceptable to the IRS.

      I’m anxious to learn how y’all do this. Thanks, in advance, for sharing.

      Bonnie

      • Miriam says:

        Hi Bonnie,

        We received the Influenster box as well. It would be much easier if we received documentation of MSRP but it does appear that the responsibility is on us to report.

        I wish I was organized enough to have a Word document – that would certainly prevent the scramble in April. I think a spreadsheet might be better so you can easily get a sum-total of everything. I don’t think you need to report individual products to the IRS, just the total value.

    • Chavonne H says:

      I have received bags of chips to review, 4 nutrition bars, some cookies, some popcorn all to review, do I really have to file taxes for that? I mean those 4 bars must be worth 5 dollars all together seriously? I sure hope not that would take forever. Also, what if you don’t file taxes because you receive disability, do you still have to file them because you receive free bags of chips in the mail from companies? Thanks so much.

      • jeff gedgaud says:

        I still don’t see how you can claim any products received as income, “Bartering is an exchange of property or services. The fair market value of goods and services exchanged is fully taxable and must be included on Form 1040 in the income of both parties.”

        The end of this quote has Both Parties in it which means both sides have to report the income/expense. I have never given my social security number out and the company never says anything to me about claiming the items I receive to the IRS. How is the IRS ever going to find out that I received the products and kept them.

        How is the IRS ever going to get a value from either side if I never report it and the company doesn’t have my social security number to report it?

    • Kara Teel says:

      I started blogging in 2012 and received over $4600 worth of review items throughout the year. How do you determine how much you are going to pay into that $4600?? Is it just sales tax (would be 7% here)? Same goes for affiliate earnings and sponsored posts? I’d like to get a general idea of what I will be paying. I didn’t receive any 1099s because I didn’t make over $600 on one single affiliate program or sponsored post. I did make over $600 all together though. Do I need to fill out a 1099-MISC? This is all so confusing!

      • jeff gedgaud says:

        I still don’t think you should be reporting anything that you get as samples or review products. You are not receiving anything of value unless you use it after the review, how is the irs going to know and document this fact. No company is going to send out 1099′s for review samples, they would laugh at you if you asked them to.

      • Seny Wilson says:

        My same question as well!

    • @Bonnie,
      An Excel spreadsheet would work to keep track of everything because you can assign the monetary function to fields as well as have it add the total of those fields. I used to use Excel for my Avon.. I was selling a lot so I kept monthly sheets.. one for sales and one for Demo products and rep supplies… Same could be done for blogging.. a sheet for products received with their MSRP listed and a sheet for any expenses incurred…

    Leave a Reply

    Your email address will not be published. Required fields are marked *

    You may use these HTML tags and attributes: <a href="" title=""> <abbr title=""> <acronym title=""> <b> <blockquote cite=""> <cite> <code> <del datetime=""> <em> <i> <q cite=""> <strike> <strong>

    Mustard Seeds

    God’s Equations and Formulas: Basics 101

    Have you ever heard of the scripture that says “God opposes the proud but shows favor to the humble.”? (James 4: 6) If you think about it, there’s a lot that can be gleaned from these words

    Read More
  • connect with us!

  • Grab our Button!

  • RSS daily verse

    • 1 Corinthians 15:55-57
      ““Where, O death, is your victory? Where, O death, is your sting?” The sting of death is sin, and the power of sin is the law. But thanks be to God! He gives us the victory through our Lord Jesus Christ.” […]
  • Sweeps Keep Giveaway

  • M is For Monster Monthly Subscription Box
  • Archives