Tax Deductions for Bloggers and Freelancers
Many bloggers and freelancers frequently ask what expenses they can deduct for tax purposes.
The answer depends on the reason you engage in blogging. You can deduct expenses you incurred in connection with your blog or freelancing gig if you can show that you run your website or freelancing activities for the purpose of generating income.
The tax law provides that “you can deduct all ordinary and necessary expenses in carrying on a trade or business.” (IRC Sec 162a).
The fist question you should answer is: Is your blog, website, or any other gig run for generating income or is it just your hobby which you do for entertainment? Your activities will be considered a business if you can show that you are actively pursuing revenue generating opportunities.
For example: If you are advertising or trying to sell something on your site than obliviously it is a business and you can deduct all your expenses for the site. Even if you just started and don’t have any revenue yet your expenses will be deductible.
On the other hand if you write a personal journal blog for yourself and your friends it will be considered a hobby and your hobby expenses can not be deducted. If you generate any revenue from your hobby you have to report it as income and in that case you would also be allowed to deduct your hobby expenses to the extent of your hobby income.
The second thing to consider: Is your expense something ordinary and necessary for your business? There is no clear definition for what is considered ordinary and necessary. I think IRS and Tax courts mostly rely on industry standards to decide what expenses are ordinary and necessary.
Thus obviously expenses like: web design, hosting, software, publications and training materials will be deductible. Home office will be a good deduction to consider too.
Be careful with more aggressive deductions like: travel expenses, meals and entertainment, sample materials etc. They can or can not be deductible depending on specifics of your business. Consult your tax advisor.
It is very important that you keep good records of all your income and expenses. Many website owners and freelancers start their businesses and don’t keep any records until tax time comes. Then they struggle to add up how much they spent and on what. Some business owners just print out their bank and credit card account statements and end up paying an accountant hundreds of dollars to go through everything and add up income and expenses.
When you start an online or any other business set up a spreadsheet to keep track of all your income and expenses. Make sure that for each transaction you record: date, description, amount, and category. When the tax filing time comes you will be able to just tell your accountant how much was your revenue and how much were your expenses for each category. If you are not sure if some expenses are deductible, set up a special category for them and ask your accountant later. As your business grows consider getting a separate credit card and bank account which you use only for business purposes.
Keeping good records of all your income and expenses will insure that you don’t loose any tax deductions and will save you a lot of money on your tax preparation bill. Also if your tax return gets audited by IRS you will be able to show and prove all your transactions to the auditor.
Disclosure: All information provided in this post is for general overview and educational purposes. This is not a tax advice. Nothing in this post can be used for the purposes of tax evasion.