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.
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!