Blogger Tax Tips

As I continued writing I noticed opportunities came up to earn some extra money. - advertisers paying for small banner ads on my blog, offers to write on other sites, and even assisting others on getting their sites up and running.

When I quit my office job a couple of years ago, I used the income I received from helping a friend with his website business and the blog to take care of my portion of the bills. Over time I realized I could be self-employed if I got a bit more organized and so I decided to go out on my own.

Decide How You’re Going to Do Business

Before you can take care of your taxes you need to make sure your business is correctly registered. For many starting out, sole proprietorship is easiest and cheapest option. However you need to see what makes the best sense for your particular work.  Possible ways to run your business include a partnership, a limited liability company, or a corporation.

Look at the legal and tax requirement of each type of entity to determine what the best option for you. I’ve found the limited liability company to work well for my circumstances.

Pay Your Quarterly Taxes

As a business that earns income, you’re expected to pay your taxes regularly in the form of estimated taxes. General quarterly taxes are due:

• April 15th - 1st quarter of the current year
• June 15th - 2nd quarter of the current year
• September 15th- 3rd quarter of the current year
• January 15th - 4th quarter of the previous year

Please keep in mind the dates may be slightly off if the 15th due date falls on the weekend or federal holiday.

The good news is that there are several ways you can pay your quarterly taxes.

• Online -Electronic Federal Tax Payment System
• Phone – Please choose the option applicable to your business:
  • 1-800-316-6541(individuals)
  • 1-800-555-4477 (businesses)
• Mail - Check the IRS to see which location is appropriate for you.

Personally I prefer using the online option – it’s quick and easy and I can immediately print out a receipt for my records. However I should point out you need to register first which takes a couple of weeks, so sign up BEFORE you need to pay your taxes.

Please also check your specific state’s requirements on taxes as it can vary.

Blog Related Business Expenses

Running and earning income from a blog does take work and keeping documents on the related expenses can help you come tax time. The good news to keeping good records is that you can deduct your qualifying business expenses from blogging when you file your taxes.

While not a complete list, here are a few business expenses I’ve had over the years:

• Office Equipment:  Office equipment like the computer and printer depreciate, which you can include on your taxes (provided they are devoted to business use).
• Office Supplies: While most of my work is done online, I do have to replenish my office supplies like copy/print paper, printer ink, and pens.
• Subcontractors: I have a staff writer for one of my sites that I pay monthly. We both keep records of the invoices and the payments.
• Website Expenses: Running a website often means paying for hosting, the domain name, and possibly privacy services.

As your business grows, you’ll probably have more expenses, but I wanted to list a few that I started off with when I made blogging my business instead of a hobby.

I use tools like Evernote and DropBox to keep records and backups of my files. They’ve been reliable and very affordable options for me. For the last few years we’ve used TurboTax Home and Business to take care of our family’s taxes and have been pleased by the ease of use of the program.

More Blogging Tax Tips?

If you’re a blogger and have been doing business for a while, what tax tips would you like to add? What tools do you use to keep everything organized?

Section 179 Expenses

One of the toughest obstacles for any new business is finding the capital required to make the appropriate investments your enterprise needs to position itself for the long-term – and to get to the point where it finally becomes profitable.

In the case of certain major expense outlays, Uncle Sam can help through what is known as a Section 179 election.  Typically, major expenses such as machinery and equipment are required to be depreciated over a term of years dictated by the IRS to approximate the useful life of the purchase.

If your small business spends $7,000 on equipment the IRS considers to be 7-year property, you can take a $1.000 ($7,000 cost divided by 7 years) depreciation deduction each year for seven years. If the business is in the 25% tax bracket, the depreciation deduction saves $250 in taxes annually.

However, certain expenses qualify for the Section 179 expense election.  If so, the business can choose (or, in IRS-speak, “elect”) to immediately expense (rather than depreciate) the purchase. Consequently, the entire $7,000 purchase could be written off this year. For a taxpayer in the 25% tax bracket, the immediate tax savings generated by the Section 179 election are $1,750.

What Purchases Qualify for Section 179 Expensing?

For the vast majority of small businesses, the key Section 179 opportunity areas are tangible (i.e., you can see it, you can touch it) personal property. Examples include not only machinery and equipment but also office equipment, including furniture, and off-the-shelf software.

When Can You Elect to Take the Section 179 Deduction?

You are eligible to take the Section 179 expense for the tax year in which you first put the item(s) purchased in service. Said another way, you can choose to take the Section 179 election when you file your tax return (Form 4562) for the year in which you purchased (not received via a gift) an item which you began to use in your business.

Are There Any Limits to the Section 179 Deduction?

The following limits to the Section 179 deduction apply:

• Dollar Maximum
• Business Income
• Percentage Use

Section 179 Maximum Dollar Limit

The maximum dollar amount you can expense via Section 179 varies by tax year and is currently $500,000.  Regardless of the amount you buy and put into service during 2011, you can’t expense more than the 2011 limit of $500,000. Furthermore, if you invest more than $2,000,000, you won’t be able to expense anything over that amount via Section 179.

The larger Section 179 tax benefit is set to expire on December 31st, 2011 and will be reduced to a $125,000 dollar limit and a $500,000 investment limit beginning tax year 2012. So if you have been debating about buying that computer equipment, you may want to go make that purchase today!

Section 179 Business Income Limit

The amount of your Section 179 expense election is further limited to the amount of net income (profit) you have from your businesses. So if using all of your Section 179 expenses would put your company in a loss position, you can only elect to expense an amount equal to what it would take to make your businesses break-even. Any unused Section 179 amount can be carried forward indefinitely and used to offset future year’s business income.

Section 179 Percentage Use Limit

Certain types of equipment, most notably computers used in home offices, are used partially for business purposes and partially for personal benefit.   Provided you use the item at least 50% for business, you can still take the Section 179 expense. However, the amount of the Section 179 expense election is limited to the percentage of time the item is used for business.  So if your new $1,000 laptop is used 75% for business and 25% for video games and looking at the weather in Ann Arbor, Michigan, you can expense $750.

Make sure you take the time to keep good records throughout the year. You’re sure to enjoy the tax savings, helping keep your business on the right track and don’t forget, TurboTax easily guides you through Section 179 deductions.

Small Business Health Care Credit

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Small business owners are eligible for a new health care tax credit, provided they meet certain eligibility requirements. According to the IRS website, your business:

• Must cover at least 50% of your employees’ health care costs
• Less than the equivalent of 25 full-time workers (thus, a company with 50 part-time workers could be eligible to participate)
• Average annual wages of less than $50,000

Both for-profit and non-profit entities can claim this credit, which “is worth up to 35 percent of a small business’ premium costs in 2010 (25% for tax-exempt employers.)” The deal gets even sweeter in 2014, when 50 percent of premium costs are credited – although the 35 percent figure remains in effect for non-profits. Not sure whether your business qualifies? Use this three step fact sheet to find out.

75% Exclusion Of Small Business Capital Gains Tax

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Prior to the American Recovery and Reinvestment Act of 2009, only 50% of capital gains on qualifying small business stock (issued after February 2009) was exempted from taxes. That threshold has since been raised to 75%. The remaining 25% of capital gains are taxed at a “maximum rate of 28 percent”, according to the Tax Policy Center. There are some requirements and restrictions, however.

First: to qualify as a “small business” and become eligible for this exemption, your business must have below $50 million in gross assets and must not operate as an S corporation. Furthermore, the “maximum gain eligible for the exclusion is the greater of $10 million ($5 million for married taxpayers filing separately) less any gain reported on prior tax returns, or 10 times the taxpayer’s cost basis (purchase price plus fees).”

Five-Year Carryback Of Net Operating Losses

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In 2009, small business owners received a sorely needed lifeline from the IRS: five-year carryback of net operating losses. This deduction (which allows business owners to offset taxes owed in one year with losses from another) was formerly only allowed for two years at a time. Per the IRS:

“The Worker, Homeownership and Business Assistance Act of 2009 allows most taxpayers to elect a 3, 4, or 5-year carryback period for an applicable NOL or loss from operations to offset taxable income in those preceding taxable years.”

One key requirement for claiming this privilege: the election to use the NOL carryback must be made within six months of a return’s due date.

$10,000 Startup Expense Deduction

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Prior to last year, entrepreneurs could only deduct up to $5,000 in startup costs stemming from the launch of a new business. But as part of the Small Business Jobs Act, this deduction was expanded:

“The bill temporarily increases the amount of start-up expenditures entrepreneurs can deduct from their taxes for this year from $5,000 to $10,000, offering an immediate incentive for someone with a new business idea to invest in starting up a new small business today.”

This is directly applicable to your upcoming 2010 tax return. If you launched a business last year, it’s in your best interest to claim as many legitimate deductions (up to the temporarily expanded $10,000) as possible.

0% Capital Gains on Small Business Investments Held 5 Years Or More

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We’ve already alluded to the 75% small business capital gains tax deduction enacted in 2009. Last year, though, an even sweeter (albeit temporary) incentive was put forth. In 2010 only, over a million small businesses were eligible to exclude from the capital gains tax investments – as long as they were held for five years or more.

This provision (which was included in the Small Business Jobs Act) affects your 2010 tax return. As of yet, there are no plans to extend this unusually generous allowance into future tax years, although that could change.

100% Expensing For 2011

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Beleaguered small business owners have one thing to be happy about in 2011. For this year only, entrepreneurs can utilize “100% expensing” to deduct from income taxes all expenses in “productive capital investments”, including delivery trucks, machines and aircraft. Prior to this policy, the only option was to depreciate the cost of these items over several years (thus spreading out the tax benefit.)

A business that makes a $1 million investment and pays a 35% tax rate could shave $350,000 from its 2011 taxes instead of perhaps $50,000 under current law, Treasury says.

As USA Today explains, the hope is that firms will have “lower taxable income and more money to spend” as a result of the immediate write-off. A preliminary Treasury Department analysis says that some 2 million companies will take advantage, generating “roughly $50 billion in added investment.”

Simplified Cell Phone Deductions

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It used to be that deducting cell phone expenses was a burdensome chore for small business owners. Since 1989, cell phones were considered “listed property” by the IRS, meaning that there were all kinds of onerous forms and paperwork to fill out before validly deducting them on income tax returns.

Thankfully for entrepreneurs, this all changed with the Small Business Jobs Act. Per LexisNexis, cell phones are now “de-listed” and thus exempt from the time-consuming requirements of old. Now, “employees will no longer need to keep detailed records to track their cell phone usage” in order to claim deductions.