Do you have a blog? Do you earn money from it? If your answers to both these questions is "yes," your blog may constitute a business for tax purposes. If so, you may be able to take advantage of many valuable business tax deductions.
Why You Want Your Blog to Be a Business
Blogs cost money--for example, online fees, design fees, and computer equipment. How you can deduct these costs depends on whether your blog is a business or hobby. If your blog is a hobby for tax purposes--as most are--you will be able to deduct the expenses you incur only from any income your hobby-blog earns. If your blog earns no income, you get no deductions at all. However, if your blog is a business, you get these deductions even if it loses money. Indeed, you can deduct your losses from other income you earn--for example, wage income from a job or investments. This make a business far more valuable tax-wise than a hobby.
What Is a Business?
For tax purposes, a business is any activity in which you regularly engage primarily to earn a profit. You don’t have to show a profit every year to qualify as a business. As long as your primary purpose is to make money, your blog should qualify as a business (even if you show a loss some years). Your blogging business can be full time or part time, as long as you work at it regularly and continuously. And you can have more than one business at the same time. However, if your primary purpose is something other than making a profit—for example, to communicate with your friends or make your opinion known—the IRS will find that your blog is a hobby rather than a business.
It's likely that the vast majority of the millions of blogs on the Internet are hobbies that earn no money for their owners. However, there are many profitable blogs that earn substantial income from Internet advertising and other sources.
There are two ways a blog can qualify as a business--by passing the profit test or the behavior test.
If your blog earns a profit in three of any consecutive five years, the IRS must presume that you have a profit motive. The IRS can still claim that your blog is a hobby, but it will have to prove that you lack a profit motive some other way. In practice, the IRS usually doesn’t attack ventures that pass the profit test unless the numbers have clearly been manipulated just to meet the standard.
To show a profit, your gross income from your blog must be more than your expenses. Any profit—no matter how small—qualifies; you don’t have to earn a particular amount or percentage. The presumption that you are in business applies to your third profitable year. It then extends to all subsequent years within that five-year period beginning with your first profitable year.
If your blog does not satisfy the profit test, it can still qualify as a business if you regularly engage in it primarily to earn a profit. Lots of businesses don't make money when they first get started. This could be the case for your blog.
You can continue to treat your blog as a business and fully deduct your losses, even if you have yet to earn a profit. However, there is a good possibility you'll face an IRS audit if you continue to report losses year after year. Thus, you should take steps to demonstrate that your blog isn’t a hobby. You want to be able to convince the IRS that earning a profit—not having fun or accumulating tax deductions—is your primary motive for your blog.
How does the IRS figure out whether you really want to earn a profit? IRS auditors can’t read your mind to establish your motives, and they certainly aren’t going to take your word for it. Instead, they look at whether you behave as though you want to make money.
The IRS looks at the following factors to determine whether you are behaving like a person who wants to earn a profit (and, therefore, should be classified as a business). You don’t have to satisfy all of these factors to pass the test—the first three listed below (acting like a business, expertise, and time and effort expended) are the most important by far.
Whether you act like a business
Among other things, acting like a business means you keep good books and other records and carry on your activities in a professional manner.
People who are in business to make money usually have some knowledge and skill relevant to the business--for example, are you an expert on search engine optimization? If not, you should try to become one.
The time and effort you spend
Businesspeople work regularly and continuously at their businesses. You don’t have to work full time, but you must work regularly.
Your track record
Having a track record of success in other businesses—whether or not they are related to your current business—helps show that you are trying to make money in your most recent venture.
Your history of profit and losses
Even if you can’t satisfy the profit test described above, earning a profit in at least some years helps show that you’re in business.
Earning a substantial profit, even after years of losses, can help show that you are trying to make a go of it.
Your personal wealth
The IRS figures that you probably have a profit motive—and are running a real business—if you don’t have a substantial income from other sources. After all, you’ll need to earn money from your venture to survive. On the other hand, the IRS may be suspicious if you have substantial income from other sources (particularly if the losses from your venture generate substantial tax deductions).