Bloggers often miss many opportunities when organizing their taxes. Writing on a regular schedule occupies a large part of the creative artist’s time. Taxes frequently become an afterthought.
Over the last two year several bloggers have approached me to review their tax situation. Some ended up as clients; other I only consulted.
A pattern has emerged. There are certain elements bloggers tend to forget. Non-cash deductions are almost always missed. Bloggers also frequently use the wrong entity structure to maximize benefits.
The Tax Cut and Jobs Act signed into law late last year has added numerous new elements to consider when planning your taxes. Bloggers need to consider these additional options or risk overpaying their taxes.
This is a good time as we head into tax season to review the tax rules affecting bloggers. We will cover the more common issues and expand into finding the best vehicle (entity) to use for your blog with a discussion on how the new tax rules affect your decision-making process as you operate your blog.
Taxable income comes from several directions when running a blog. Google and similar advertising platforms provide a steady stream of income.
Amazon is a nice side niche getting worse every day as they reduce the fees paid on virtually every category.
Some bloggers have a specific advertiser lock in a location on their blog. All this income is reportable and subject to tax.
Serious money is earned from books and programs. Most bloggers understand these need to be reported on their return.
Other affiliate programs can turn a nice blog side gig into serious money. Good recordkeeping should assure you don’t miss any reportable income saving you angst should an audit letter arrive.
Before we leave income I want to point out one income source I bet everyone in the blogosphere is missing: awards swag. As a recent winner of the Plutus Awards for Best New Personal Finance Blog of 2017, I received some swag. There was some pretty cool stuff in there. The IRS also makes it very clear this is reportable income. It’s not my job to police you. My job is to inform. (Yeah, I know. Party pooper!)
Bloggers have more business expenses than they realize. Even blogger clients think they have virtually no expenses! I have my hands full educating them. I also stalk my blogger clients as they tend to write what they are doing in their blogging business which gives me a good idea of what expenses will show up in their financials. When the financials lack the expected deductions I inform my client of my stalking tendencies and chisel the deductions out of them. Sometimes their blog post IS the deduction substantiation!
Bloggers who have a designated area in the home used on a regular and exclusive basis for their blog have several deductions coming their way. A proration of all home expenses are allowed as a deduction, plus all expenses directly related to the work space (repairs and maintenance, for example). Depreciation is also allowed.
If recordkeeping for a small office in the home is too much work you can always use the safe harbor of $5 per square foot of office space. The maximum home office deduction allowed with the safe harbor is $1,500 per year. Property taxes and mortgage interest are then fully reportable on Schedule A should you itemize.
There is a small issue between actual expense and the safe harbor of the home office. Sometimes the blog might not be profitable or only has a small profit. The home office deduction cannot cause a loss on Schedule C (for sole proprietors). Unused home office deductions are carried to the next year when actual expenses are used whereas the safe harbor deductions are permanently lost if you are unable to use them currently.
Office supplies, promotional expenses, postage and blog maintenance fees are all deductible. Most out-of-pocket blog related expenses are written off in the year paid (assuming most bloggers are cash basis taxpayers).
Travel is common in the industry. I find most bloggers are unsure of what travel they can deduct so they don’t take any deductions at all except for conferences they attend. More is deductible than you might expect.
If you always wanted to see Australia or retired and travel the world while writing a blog to fill time the expense is NOT deductible! A pure pleasure trip down under is not business related. But there might be several opportunities to deduct some expenses.
A blogger in this genre wanted to know if he could deduct some travel expenses where personal was intermixed. He was in the Philippines and was invited by another blogger to visit him is Taiwan (I think). He made the trip so he could discuss some business plans for his blog. I argue the air flight and all related expenses to travel from the Philippines to Taiwan are deductible, including, hotel and the meals and incidentals per diem (more on the per diem later). If he flew back to the Philippines or home I would argue this is deductible. If he flew on to a personal destination the last leg of travel might not be allowed. However, as long as the business portion of the travel is still in effect it should be an allowed deduction.
There are several non-cash deductions related to travel. Business miles are deductible. You can also deduct a per diem for meals and incidentals (M&IE) for each day on the road (technically, every overnight outside the metropolitan area of your residence). Lodging expenses also have a per diem for employees, but not owners or employee-owners; owners must use actual lodging expenses.
There are two ways to calculate your M&IE deduction: the high-low method or based on the rate for each city you conducted business in (involving overnight travel) and actual expense. The high-low method is easier. You get a flat M&IE rate of $57 for most areas within the continental U.S. (CONUS) and $68 for a few high cost areas.
DOT workers have a special rate of $63 within CONUS and $68 outside CONUS (OCONUS).
There are rates for OCUNUS as well for non-DOT workers.
You are allowed to switch methods during the year, BUT you must use the same method within a single business trip.
Meals and incidental expenses are 50% deductible for businesses; 80% for DOT workers (ie. truckers).
There is a modest amount of recordkeeping involved, but worth the effort. The per diems add up fast.
If your spouse travels with you and performs business related activities they may also qualify for a deduction of their travel expenses, including the M&IE per diem.
Business or Hobby
This question has taken on more meaning in 2018. For 2017 hobby expenses are still reported on Schedule A, subject to 2% (the first 2% of AGI of deductions in this category (safe deposit box, tax preparations fees, hobby expenses et cetera) reduce the actual deduction). In 2018 the “subject to 2%” part of Schedule A disappears. This means hobby expenses are never deductible in 2018 and after until they either change the Tax Code or the current provisions expire at the end of 2025.
I think most bloggers are a business even if they think they aren’t. Not making a profit doesn’t mean you are a hobby! If you have a profit motive and conduct your affairs in such a manner you are almost certainly a business.
If you make a profit more than 2 out of a five year period the IRS automatically assumes you are a business and not a hobby.
Business Structure and Entities
When you hang a shingle saying you are in business you are in business. You default to a sole proprietorship or partnership if there are two or more owners.
It’s a good idea to get some legal liability protection with an entity. Organizing as an LLC is the most common way to conduct business. You can also organize as a corporation and elect to be treated as an S corporation.
LLCs have a huge advantage; they can take on the flavor of any tax treatment available. An LLC can be a disregarded entity and reports their taxes as a sole proprietor (Schedule A of the individual tax return) or a partnership if there are two or more owners.
Organizing your business as an LLC means you can elect to be treated as a corporation and therefore, can elect to be treated as an S corporation (a pass-through entity).
The biggest advantage an LLC has is the ability to change flavors (how they are taxed) without reorganizing the entity. You can start as a disregard entity taxed as a sole proprietor and later elect to be treated as an S corporation. The first election can be made at any time without question by the IRS. Any subsequent change must be after five or more years since the last election changing how the entity is taxed. Example: An LLC is treated as a disregarded entity starting in 2015. The business grew so the owner elected to be treated as an S corporation in 2017. Since the first election is automatic at any time the election is allowed. The LLC cannot again change how it is taxed until tax year 2023, the five-year required waiting period.
Which Entity is Best
The sole proprietorship (or disregarded entity) is the easiest to account for. The business income and expenses all are reported on the personal tax return on Schedule C. The one drawback of the sole proprietorship is the self-employment tax.
Most clients don’t make a lot of noise when I show them their income tax, but they squeal like a stuck pig when I show them the SE tax added on top. The SE tax is 15.3% on top of income taxes. There are some limits to the SE tax we will not cover here.
Once you have any significant blog income you will want to be an S corporation or LLC treated as such. As your income rises the taxes assessed a sole proprietor become increasingly painful.
S corporations (we will discuss regular corporations (C corps) in the next section on recent tax changes) are pass-through entities. Profits flow to the personal tax return. These profits are assessed income tax only, no SE tax.
S corporations are required to pay owners reasonable compensation. This is a wide road to travel and offers plenty of opportunities with serious pitfalls for the overaggressive. The owner’s wages are subject to FICA taxes (the twin sister of SE taxes). The remaining profits are taxed for income only.
Decision Tree Using Recent Tax Law Changes
For decades the entity decision was fairly straight forward. Once profits hit $30,000 – $50,000 it was time to think about an S corporation. Some businesses require higher profits before considering an S corporation, but anything under $30,000 is hard to justify considering the additional payroll accounting costs for owners and additional tax return preparation fees for the S corporation tax return.
The Tax Cut and Jobs Act changed all that. Regular corporations are now a consideration. Tax rates have dropped significantly for C corporations, except for those with profits less than $50,000.
C corporations always had one serious flaw small businesses couldn’t overlook: the double taxation of dividends. Now that the corporate tax rate is a flat 21% and all other business owners face a tax rate as high as 29.6% after considering the new 20% business income deduction, regular corporations are back in play.
For the first time in my career I have to seriously consider the regular corporation as an option. The choices are no longer so simple.
Also, reasonable compensation has more than one purpose. Most business owners want to keep their wage as low as possible to minimize FICA taxes. Now, S corporation owners may need to reconsider a HIGHER wage and FICA taxes to meet the cap on the business income deduction ($315,000 for joint returns and $157,500 for all others). An S corporation with one owner filing jointly on her personal return and $450,000 in profits will not qualify for the business income deduction. If the owner takes reasonable compensation of say $150,000, the S corporation will only have a $300,000 profit and the owner WILL qualify for the deduction if she files a joint return.
(Note: Don’t be confused about the reasonable compensation and guaranteed payments to partners issues. Wages can bring down the income and qualify the owner for the deduction for the cap. Reasonable compensation and guaranteed payments to partners do NOT count when using the formula for business owners above the cap. The formula above the cap is 50% of wages excluding those we mentioned OR 25% of wages excluding those we mentioned, plus 2.5% of the value of qualified property at purchase, generally unadjusted. (Think real estate.))
Time is on Your Side
Sweat is running down your forehead by now, I’m sure. Not to worry.
Review your books and make sure you didn’t miss any deductions for 2017. Things haven’t changed much this year. However, bonus depreciation on assets with a class life of 20 years or less is 100% if placed is service on or after September 27, 2017. For most businesses opting out of bonus depreciation this year is a bad idea. A bigger deduction this year coupled with a bigger profit next year when 20% of profits are a deduction is a powerful planning point.
We have plenty of time to review your situation before deciding which entity structure is right for you. Your favorite accountant will be busy this summer.
My office will review all business clients after tax season to determine if changes are appropriate.
For you, kind bloggers and readers, you are welcome to contact my office to review your situation. Most reviews will be after tax season. We will have time to facilitate any recommended changes to take full advantage of the new tax law. Don’t be surprised if you missed several deductions. Bloggers do that a lot.
I may ask one favor if you do contact my office. I might ask you to give me a plug on your blog because I’m a bit of a traffic whore. All you’ll be asked to say in an Irish accent is:
“Oh, that Wealthy Accountant fella is one swell guy.”
Now that wouldn’t hurt too much, would it?