(This is the second in a series of articles about blogging and taxes. Part one is here.)
Yesterday we talked about whether you needed to establish yourself as an LLC, how to go about doing that and other "starting out" business considerations. Today I'm going to tell you about what constitutes business income and what to do when people start talking about a home office deduction.
WHAT AM I SUPPOSED TO REPORT AS INCOME?
If you sell advertising space on your blog and make over $600 per advertiser, the advertiser is required to send you a 1099 reporting the amount that was paid to you for advertising space. By providing you with a 1009-MISC they are also REPORTING YOUR INCOME TO THE IRS. One of the easiest ways to generate a notice for yourself is to fail to make your return match documents that the IRS checks against your return and social security number to . This includes W-2's, K-1's, and 1099's of any kind. The IRS has a document matching program that is pretty serious about making sure all income reported to them by a third party is reported by you on your return.
Even if you don’t receive a 1099-Misc from an advertiser, you are still required to report that income on your return. If you don’t have any expenses (and I bet you do, we’ll talk about what those are tomorrow) the income gets reported on Line 21 of your 1040 as other income. If the aggregate is greater than $400, you will owe self employment tax, which is 15.3% of your earnings. You get a deduction on page two for half of that self employment tax. Self Employment tax is the Social Security and Medicare taxes that would be taken out of your paycheck were you employed by someone else. If you were receiving a W-2, you would see 7.65% in total for Social Security and Medicare, and your employer would be required to deposit the other 7.65%. But, if you are self employed, YOU are the employer and must pay in both halves of the tax.
I KEEP HEARING ABOUT A HOME OFFICE DEDUCTION, SIGN ME UP FOR THAT!
Well, not so fast. Do you rent an apartment or a house? Then this might be a better option for you than if you are a home owner. The rule is that your home office must be used exclusively for business. This doesn’t mean you can deduct the square footage of your kitchen table or your couch. If you use our office for personal use at all, it is not deductible space.
The reason why you don't want to use the deduction if you own your home is simply record keeping. The deduction is not ever going to be a large amount. When you sell your home, you have to do some more complicated calculations for recognizing gain on the portion of your home you used for business. It can get messy. Since the IRS allows a married filing jointly couple an exemption on the gain on the sale of a home up to $500,000, anything that makes you add back income is probably not a good idea.
The old way around this was to not take depreciation when figuring your home office deduction. Everyone thought they would be smart by not taking the deduction and then there would be no reason to make an adjustment to the basis when the house was sold. The IRS caught on to this trick and decided that they didn’t care what you had done, the basis still needed to be reduced. So there's no advantage to not taking the depreciation.
If you do decide to take the home office deduction, it cannot be used to reduce your business income below zero. There are several things you need to keep up with if you qualify and want to take the home office deduction. You will need the full square footage of your home, the square footage you use for business. You need to keep up with the basis in your home - the purchase price and any capitalizeable items that have been purchased increase your basis. You also need all of your bills for your house, mortgage statement with interest, insurance and property taxes, electricity, gas, water, whatever your utilities happen to be. You have to break out the value of the land your house sits on (land is not a depreciable asset). This information is all put on Form 8829 and either carried to Schedule C or to your Schedule A as a miscellaneous itemized deduction subject to the 2% limitation.
See how complicated this can get? Most people's offices take up less than 10% of their house and the deduction won’t be all that much. Certainly not enough to fool with interest expense and calculating the value of your land and the basis in your home and how many trips to Lowe's you made this year.
If you rent, most of this headache goes away. As long as you use the space exclusively for business, you need to keep up with your expenses and the square footage of the office and you’re ready to go! You still report the information on From 8829 and it flows to either your Schedule C or Schedule A.
Thursday, I'll talk about deductible business expenses and where to report all this. And Friday, I'll answer any questions you might have, just leave them in the comments or e-mail me.
Don't forget about my giveaway. It's open until Friday and is a great deal for anyone with allergies.
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I do work like this and more for a internet based businesses, and I can help you!
DISCLAIMER: Any tax advice was not intended or written to be used, and cannot be used, by the recipient for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code or applicable state or local tax law provisions.
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