Tax Return for Bloggers, Photographers, Digital Nomads, and Entrepeneurs

Tax Return

It’s that time of year again. Yup, it’s time to file those tax returns! If you don’t know who the IRS is then consider yourself lucky and check out this post about Croatia instead. Americans only going forward.

The anxiety everyone gets from taxes is unwarranted. It’s the best time of the year! It’s when you can stick it to the IRS by taking back your quarterly payments, bit by bit, until you fall under the 15% tax bracket. Celebration soon follows with a nice cold beer from your hostel bar and a high five from the bartender when you tell them you just got $1,000 bucks back for an hour of your time. Maybe when you file your tax return it isn’t as easy as mine, but it can be.

Don’t Be Like That Guy

Before we begin, I need to establish something first. Travel blogging and travel photography are scrutinized very closely by the IRS. This article is for those who truly have a business: a blog, website, or other service. You must be either making income now, or striving to make an income in the future.  Why? Joshua will help us explain…

Joshua quit his job and decided to travel for 5 1/2 months while deducting all of the travel as a business expense. He thought he was going to pull a fast one over the IRS by creating a blog and throwing a couple of posts and pictures on it (there’s obviously more to the story, but that is the gist). Unfortunately for Joshua, the IRS audited him and he ended up in tax court. There is a very fine line between a business and a hobby when it comes to travel blogs. The IRS considers a business an activity carried out or service provided with the intent of making a profit. In Joshua’s case, it was determined that he was not engaged in an activity for profit and there were “elements of personal pleasure and recreation in the activity.”

Here is what happened: the Internal Revenue Code allows deductions for ordinary and necessary expenses incurred in conducting a trade or business or for the production of income. Secs. 162(a), 212(1). Under section 183, if an activity is not engaged in for profit, then no deduction attributable to that activity is allowed. Right here, you can see the difficulty. To take photographs or write a blog post about Siem Reap, you need to visit Siem Reap. Your Angkor Pass as well as your travel, food and lodging, can then be considered business expenses and be written off. But, if you were taken to court, how could you possibly argue that there were no “elements of personal pleasure and recreation” while visiting one of the most beautiful palaces in the world?

The standard to decide whether a taxpayer is carrying on a trade or business so that his expenses are deductible is to examine whether the taxpayer’s primary purpose and intention in engaging in the activity is to make a profit (Dreicer v. Commissioner).

The Court examines the facts and circumstances of the each situation by using the relevant factors in section 1.183-2(b). Such factors include:

  1. The manner in which the taxpayer carries on the activity
  2. The expertise of the taxpayer or his advisers
  3. The time and effort expended by the taxpayer in carrying on the activity
  4. The expectation that assets used in the activity may appreciate in value
  5. The success of the taxpayer in carrying on other similar or dissimilar activities
  6. The taxpayer’s history of income or losses with respect to the activity
  7. The amount of occasional profits, if any, which are earned
  8. The financial status of the taxpayer
  9. Whether elements of personal pleasure or recreation are involved.

No one factor is determinitive. Simple numerical majority will not indicate a lack of profit motive or vice versa, and the Court may accord certain factors greater weight than others. Each of these factors will be analyzed in turn, and the Court will give greater weight to the objective factors listed above.

If you are interested, you can read Joshua’s entire case.

1. The Manner in which the taxpayer carries on the activity. If the taxpayer carries out an activity in a businesslike manner, maintaining complete and accurate records, performing the activity in a manner substantially similar to that of other activities that are profitable, modifying techniques and methods that appear to be unprofitable in an intent to improve profitability all might indicate a profit motive.There are many examples for this scenario depending on each individual situation, but some might be not including your sole proprietorship or LLC on your tax return, not opening a separate bank accounts for your business (and funding it), not maintaining books for business expenses, no written business plan, no estimate on profitability or estimates on when large milestones will be completed, no evaluation on the profitability of the business based on receipts, and no prior investigation of the activity before starting the business.

“Taxpayers who undertook an activity with no concept of what their ultimate costs might be, how they might operate at the greatest cost efficiency, how much revenues they could expect, or what risks could impair the generation of revenues did not operate in a businesslike manner.”

2. The expertise of the taxpayer or his advisers. This point relates to the undertaking of a basic investigation of what would make a certain activity profitable. It doesn’t require any formal study, but the taxpayer should understand basic business, economic, scientific principals related to the activity, and or consult with an expert.

This could be as simple as spending three hours reading about how people make money with blogs.

3. The time and effort expended by the taxpayer in carrying on the activity. If a particular activity contains no substantial recreational aspects, it may indicate intention to derive a product, especially if a significant amount of time and effort is expended. Furthermore, leaving a job to devote time to the activity also may be evidence of a profit motive.

Creating a business also implies habitually devoting time and attention to an activity. If you undertake an activity for a temporary period of time, it may indicate a lack of profit motive.

4. The expectation that assets used in the activity may appreciate in value. An overall profit could be realized if the value of assets combined with any income exceeds the expense of the activity. This is saying if there is an overall trend in the appreciation of your product, website, blog posts it is an indication that there is a product motive.

5. The success of the taxpayer in carrying on other similar or dissimilar activities. If the taxpayer has engaged in a similar activity or business previously and is proven in his or her ability to make a profit, even if the activity is currently unprofitable, there may be a motive for profit.

6. The taxpayer’s history of income or losses with respect to the activity. Everyone has start-up costs and it’s okay to report a series of losses during this phase. However, continued, sustained losses beyond this period may indicate a lack of profit motive. A series of years in which a net income was realized is a strong indication the activity is engaged for profit.

7. The amount of occasional profits, if any, which are earned. Income may not be steady during the start-up phase or beyond. Sporadic income throughout the lifetime of the activity may be an indication of a profit motive.

8. The financial status of the taxpayer. If the taxpayer does not have capital or income from other sources other than the activity is an indication it is for profit. If the taxpayer does have substantial income from other sources, especially if the losses from the activity create a benefit on their tax return, there may not be a profit motive. If recreational elements are involved in the activity, this fact is exemplified.

9. Whether elements of personal pleasure or recreation are involved. “The presence of personal motives in carrying on an activity may indicate the activity was not engaged in for profit, particularly where there are recreational or personal elements involved.” Sec. 1.183-2(b)(9), Income Tax Regs.

When we talk about tax returns, we need to break it down into manageable pieces. I have organized this document into four main sections: residency, income, business structure, deductions. Each section builds on the previous to give you a full understanding about how each section interacts.

Residency

When you file your tax returns you have to supply an address. Many travel bloggers and photographers are constantly on the move, so this proves to be difficult, but only because they don’t fully understand its purpose. The address you supply doesn’t actually represent the address you reside at. Therefore, you can use any address that’s useful to you. The IRS uses factors other than the address on your return for determining your residence! Your primary residence is your state of residence, where your mail is sent, where you are registered to vote, (likely) where your drivers license was issued from. This is important because your primary residence effects your tax liability. If your primary residence is abroad, then you can likely take advantage of several exclusions that will greatly decrease your taxable income. If your primary residence is in the US, you are going to end up paying federal income tax (and state income tax, depending on the state).

The two big exclusions you may qualify for if you reside outside the US are the Foreign Earned Income Exclusion and Foreign Housing Exclusion/Deduction (both discussed here and in the Deductions and Exclusions section). Another possibility is the Federal Tax Credit (FTC), which can be claimed if you paid tax in another country. This is also discussed in greater detail in the Deductions and Exclusions section.

If you reside outside the US, professionals recommend using a non-US address when filing your taxes, especially if you used to live in California, Arizona or New York. These states have notoriously difficult residency laws and may come after you for state income tax.

Income

The federal government is interested in all income you make from any source, foreign or domestic, regardless of how it is made. If you make money from advertising, it is taxable. If you make money from giveaways on your website, it is taxable. Sponsored posts, affiliate links, paid appearances, speeches, foreign income (income from a foreign company), domestic income (full-time, contract or freelance work), physical products, non-physical products (ebooks, memberships), you guessed it, it is all taxable.

Occasionally, digital nomads will receive products or services in return for a mention on their social media, blog or website. These items are considered income at “their fair market value.” If you accept items (physical products) or services (hotel room, free trip, free meals, etc.) from a brand, sponsor, hotel, or any other company get its “fair market value” in writing before accepting it. This cost can be the cost to the supplier, not necessarily what the item retails for. In other words, if you agree to write about a post about the new Canon 5d Mark IV and you know it retails for over $3,000, but the cost to produce a single unit is far less, ask Canon to put that cost value in your contract.

If you receive any of the aforementioned products or services from companies hoping you will review them and they are sent in an unsolicited manner, that is, you never signed a contract in exchange for the items, then they are not considered income regardless of whether you provide a review.

Business Structure

If you are a full-time, W2 employee, consider yourself lucky. Unless you are considering starting a business, the business structure topic doesn’t affect you at all.

For those that have a business, we are going to begin by classifying whether its a ‘business’ or what the IRS considers a ‘profession.’ This may seem boring, but it can have a huge tax implication.

Business vs. Profession

A professional sells their own services. They don’t sell a product, they sell themselves. If a software consultant bills a client at $50/hr to debug a section of code, they are providing a service. If the consultant were to be removed from the equation, the work would never get done. A large majority of freelance jobs are professions. Graphics designers, copywriters, software developers, web designers, business advisers, online ESL teachers, language translators – all of these trade a set amount of time for work, they are professions.

What if the software developer, instead, created a WordPress plug-in or a graphics designer created a website template and sold their product on their own website or another website? If they were removed from the equation their product would still exist and could still be purchased. Instead of selling themselves as a service they encapsulated a percentage of their time into a product that will be repeatedly purchased. This is a business. All of the aforementioned trades can also be considered businesses, it just depends on how your company is structured.

Ecommerce sites are also businesses; you are simply selling a physical product instead of a digital product. Blogs are generally also businesses because you don’t make money from a post (unless all your income is sponsored posts). You make money from affiliate marketing in the post, and advertising on your blog. Once your post is written, it will organically drive traffic to your income streams.

As you will see very shortly, this simple determination can have a huge impact on the structure of your business.

Sole Proprietorship, LLC and Non-US Corporations

This section is going cover the two most common business structures, what purpose they serve and they function. It also includes a third structure that many people commonly equate to money laundering and other illegal activities, but it is perfectly legal if structured correctly.

Sole Proprietorship

A sole proprietorship is a business structure owned by a single person, you. They are extremely easy to set up and require almost no legal work. For instance, in California you can create a sole proprietorship in as little as two steps (and one of the steps is picking your business name!). It’s also important to note that you generally only need to file documentation if your business is actually operated in whatever municipality you call home. If you have a blog and you only write blog posts while you are traveling abroad, or you are an expat who hasn’t stepped foot in the US in five years, you more than likely have a sole proprietorship simply by stating aloud that you have one (it’s that easy). Every state and even municipalities in each state differ in their regulations, so you will need to familiarize yourself with what your municipality requires.

With a sole proprietorship you are subject to self-employment tax (15.3% on the first $118,500, %2.9 after) as well as federal and state income tax. With a sole proprietorship you and your business are the same entity and you pay taxes as such. If you have a full-time job making $50,000 and freelance on the side with your business “Magoon Web Development” making an additional $20,000 a year, your total gross income for the year will be $70,000. Your full-time job and your side job are the same entity and you are taxed at $70,000 less deductions.

A Sole proprietorship is great for individuals just starting out that want to solely focus on their business and leave the legal paperwork to a minimum, but they aren’t great for individuals making over $50,000 or individuals that operate in industries with a lot of legal liabilities. Commonly referenced high liability professions are any job in the financial industry, any business with a physical location, or any business in physical products (especially children’s toys). But, if you are a software consultant or web developer working for a large corporation or business, that can be considered high risk as well (what if you accidentally break the website’s purchasing system and they lose sales for an entire week, you will be liable for all of that). If you have legal liability concerns, your best bet is just to set up an LLC because if you are sued, your personal assets will be at risk.

Limited Liability Corporation (LLC)

A LLC is an ownership structure that shields its owners’ personal assets while allowing any profit or loss to pass through to the owners and taxed on their personal tax returns (just like the sole proprietorship). There are several things that are true when comparing LLC’s to sole proprietorships (this is by no means a comprehensive list):

  1. They are more expensive. You must file “articles of organization” (named differently depending on municipality) when forming an LLC. This can range from $100 to $800. On top of that, certain states (like California) tax the LLC every year regardless of income. California, one of the most expensive states, taxes anywhere from $800 to $11,000 annually, depending on the LLC’s income.
  2. They require a lot more paperwork.  In addition to the articles of organization, you will need an operating agreement which outlines all of the members’ rights and responsibilities, their interest in the business and how the business will be conducted.
  3. They are a lot more flexible. You can elect your LLC to be treated like a corporation for tax purposes. This means the first $75,000 of income is taxed at a lower rate (25%) than the individual income tax rates that apply to most LLC owners (15.3% + ~21%).
  4. You can structure the payments as wages and dividends. With a sole proprietorship, all of your income is wages. With an LLC, you can break it down between wages and dividends, which allows you to reduce your self-employment requirement.

Assuming no deductions, this is a breakdown of a sole proprietorship vs an LLC that has elected to be taxed as a corporation.

Sole Proprietorship LLC Taxed as S-Corp 
Profit $100,000 $100,000
Structured as Wages $100,000 $50,000
Taxes on Wages ($21,037) ($8,294)
Self-Employment Tax (roughly) ($15,300) ($7,650)
Deductible part of SE Tax $7,650 $3,825
Structured as dividend N/A $50,000
Dividend tax (15%) N/A ($7,500)
After tax income $71,279 $80,381

As you can see, at $100,000 there is a huge beneficial to be structured as an LLC with a corporate tax election. As profit decreases, so does the after tax income. At about $50,000, both structures break even. At this point, from a purely financial perspective, they are the same. This is one of the reasons why many business chose to start as a sole proprietorship.

Sole Proprietorship LLC Taxed as S-Corp 
Profit $50,000 $50,000
Structured as Wages $50,000 $25,000
Taxes on Wages ($8,271) ($6,220)
Self-Employment Tax (roughly) ($7,650) ($3,825)
Deductible part of SE Tax $3,825 $1,913
Structured as dividend N/A $25,000
Dividend tax (15%) N/A ($3,750)
After tax income $37,904 $38,118

Non-US Corporation

A non-US corporation is a non-US entity classified as a corporation for US tax purposes. Tax evasion??? No. Everything you are about to read is 100% legal. Remember our business vs profession discussion above? It comes into play here. If you don’t qualify for each item below, this strategy will not work for you.

  1. You operate a business not a profession
  2. Your business must not be “engaged in a US trade or business”
  3. Any employee(s) (this includes yourself) must not be located in the US
  4. The business must not have an office in the US

If you meet all four requirements, these are the benefits you will gain by structuring in a non-US corporation:

  1. Pay no federal income tax (see FEIE here and below)
  2. Pay no self-employment tax
  3. Avoid certain FEIE rules regarding self-employed individuals
  4. Avoid US tax on income less your salary until you pay it to yourself as a dividend

This just may look like a nicely formatted list, but #2 and #4 have huge implications. We haven’t talked about deductions yet, but FEIE is a very commonly talked about tax exclusion in the digital nomad world. It not only applies to the non-US corporate structure we are talking about, but it also applies to sole proprietorships, LLCs and full-time W2 employees. It is discussed in greater detail in the deductions section (and here), but the gist is you can exclude up to $100,800 in foreign earned income.

Just like with an LLC (taxed as an s-corp) a non-US corporation can elect a percentage of its income as wages and a percent as dividends. But, since its a corporation, you can re-invest the money in the corporation and let it sit tax deferred until you decide to take it as a dividend or sell your company. Because a corporation is an ‘entity’ just like an individual, it can do just about anything, including purchasing stocks and mutual funds. Since you have no US based employees that operate your business, your corporation itself is not subject to US tax on any income. You yourself are an employee, so you will qualify for FEIE and you don’t pay self-employment tax. As long as you don’t take a salary greater than $100,800 per year, you pay no federal income tax.

Any additional income less the salary you take is re-invested in the company tax deferred until you sell the company or pay yourself dividends. Tax deferred. It’s like a Roth or a 401k, but there are no limitations on how much you can leave in the account.

To see the full benefit of this structure, we are going to compare it to our previous example and include FEIE in our calculations.

Sole Proprietorship LLC Taxed as S-Corp  Non-US based Corp 
Profit $100,000 $100,000 $100,000
Structured as Wages $100,000 $100,000 $100,000
Taxes on Wages (after FEIE) ($0) ($0) ($0)
Self-Employment Tax (roughly) ($15,300) ($15,300) ($0)
Deductible part of SE Tax $7,650 $7,650 $0
Structured as dividend N/A N/A $0
Dividend tax (15%) N/A N/A ($0)
After tax income $92,350 $88,675 $100,000

and what if you make even more than $100,000?

Sole Proprietorship LLC Taxed as S-Corp  Non-US based Corp 
Profit $150,000 $150,000 $150,000
Structured as Wages $150,000 $100,000 $100,000
Taxes on Wages (after FEIE) ($28,000) ($0) ($0)
Self-Employment Tax (roughly) ($16,750) ($15,300) ($0)
Deductible part of SE Tax $8,375 $7,650 $0
Structured as dividend N/A $50,000 $0
Dividend tax (15%) N/A ($7,500) ($0)
After tax income $113,625 $134,800 $150,000*

*This assumes that you leave $50,000 in the non-US corporation

This table should show the striking difference between the three business structures and the huge advantage that non-US corporations have over the other two. With all three structures you can make the same profit, but with a non-US corporation and FEIE, you can take a sizable salary every year and invest your remaining profit, tax deferred, for as long as you want.

Deductions and Exemptions

Like I mentioned in the Business Structure section, if you are a W2 employer there isn’t much here for you. Just consider yourself lucky that your tax returns are so simple. You can have personal deductions and exemptions (housing, charitable donations, education, medical, dependents etc.), but you will rarely have business related deductions.

Deductions reduce your taxable income derived from expenses, while exemptions reduce your taxable income based on your ‘living situation’ (dependents, foreign income etc). The difference between the two is not important for this article. What is important is that by taking deductions and exemptions you reduce your taxable income.

If you make $100,000 gross in 2016 and put 6% into a pre-tax 401k account, your taxable income is reduced to $93,000 = ($100,000 – ($100,000*.6)) (this is technically deferring taxes until you withdraw it, but it emphases the point). Say you have two kids and you file them as dependents on your tax return. You can exclude $3,950 for each kid, reducing your taxable income by $7,900 to $85,100. Federal income tax on $93,000 is approximately $19,000 while federal income tax on $85,100 is approximately $17,000. Your kids just saved $2,000! Buy your kids some ice cream and thank them for being awesome.

You keep applying deductions and exclusions until either (a) you have no taxable income, or (b) you have no more deductions and exclusions to apply. There are many, many exemptions and deductions you can take depending on your situation, and this is where things get very complicated. Remember Joshua from the beginning of the article? He was the guy who decided to travel for 5 1/2 months and deduct all of his expenses as as business expenses. Your expenses need to truly be business expenses, and you need to substantiate your claims (be able to prove they are business expenses). I’m going to make this list as comprehensive as possible because so many people pay WAY too much on their taxes and they are not aware of what they can legally write off. If you haven’t read about how the IRS determines profit motive, I suggest you do before you go deduction crazy.

1. Federal Earned Income Exclusion (FEIE)

In general, U.S. citizens and U.S. resident aliens are subject to federal income tax on worldwide income. However, the FEIE allows qualified taxpayers to exclude from taxable income up to $100,800 of foreign earnings.

The FEIE permits qualified taxpayers (“Remotes”) to exclude income earned in foreign jurisdictions from U.S. tax. Remotes that have a prolonged absence from the United States, who are either U.S. citizens or U.S. resident aliens may be eligible to benefit from the FEIE. There are a number of rules governing the FEIE that you need to understand to determine whether you qualify. More information on FEIE can be found here and here.

2. Federal Housing Deduction/Exclusion

If your tax home is in another country(ies) and satisfy either the Bona Fide Residence test or the Physical Presence test (discussed further in the FEIE links), then you can also claim an exclusion or deduction from your gross income for your housing amount. Whether you claim the exclusion or the deduction depends on the source of your income. You can claim the exclusion if your income is ‘employer-provided’ and you can claim the deduction if your income is ‘self-employed.’ For more information on the housing deduction read this and this.

If you find yourself in the realm of this deduction, you will absolutely want to speak to a CPA. If you qualify for the Bona Fide Residence test you will most likely be paying taxes to the country you are residing in. Therefore, you need an account to determine whether this deduction/exclusion or the following tax credit is most beneficial.

3. Foreign Tax Credit (FTC)

If you paid or accrued foreign taxes to a foreign country and are subject to U.S. tax on the same income, you may be able to take either a credit or an itemized deduction for those taxes. Generally, you are better off taking the tax credit. Deductions were explained earlier, but a tax credit works differently. Instead of reducing your taxable income, the taxes you owe is determined from your taxable income and the tax credit is then applied to that amount.

The FTC laws are very complex. If you are living in another country and paying foreign taxes you absolutely need to talk to a CPA. They will determine the best option for you, because you cannot use the FTC and claim FEIE at the same time. You can read the FTC rules and regulations here.

4. Inventory/Cost of Goods Sold

If you have a drop ship or ecommerce company you can deduct the cost of goods. For instance, if your gross income on your physical products is $100,000, but the physical products themselves cost $40,000 to purchase, then you can deduct $40,000. This cost includes freight as well, so if it costs an additional $5,000 to package and ship your products from China to Amazon in the US, you can deduct that as well.

If you have employees, their direct labor costs are also deductable.

5. Startup Costs

If you are still in the startup phase of your company, many of the costs you incurred can be deducted. These costs must have been incurred ‘before’ you actually started your business.

  • Market Research (market research programs)
  • An analysis or survey of potential markets, products, labor supply, transportation facilities, etc.
  • Travel and other necessary costs for securing prospective distributors, suppliers, or customers
  • Salaries and wages for employees who are being trained and their instructors
  • Accounting and Legal Fees (for articles of organization, operating agreement, LLC fees, etc.)
  • Advertisements for the opening of the business
  • Equipment like cameras, computers, software, etc.

6. Advertising

Use Facebook to promote blog posts, Google AdWords to advertise your products? All of your advertising expenses are deductible.

7. Software or Service Subscriptions

If you pay for any plugins, software, or services like SEO Yoast, Mailchimp, WooCommerce, Instapages, Microsoft Office, Adobe Suite…the list is endless, you can deduct all of these expenses.

You can also deduct the cost of your web hosting, any domains you purchased, and premium WordPress themes.

8. Meals and Entertainment

Meals and entertainment are broken down into two sections (each section effects your taxable income differently).

a) Meals while traveling for business, entertaining your business associates, shows, nightclubs etc.
b) Company parties or gatherings, charitable events business travel

You need to use your best judgement when deducting meals. If the IRS see’s a $40,000 profit and a $20,000 deduction for meals, they are probably going to look into it.

9. Lodging

Hostels, hotels, AirBnB.

10. Transportation

Air, train, bus, rental car, Uber, Lyft, tuk tuk.

11. Communication

Business phone line, long distance calls, SIM cards, Skype credit.

12. Contract Labor

Hired a contractor to design your website? Create your logo? Edit YouTube videos? Guest post on your blog? Translate content? It’s all deductible.

13. Office Supplies

Pens, pencils, paper, printer, business cards, items for DIY projects, you get the idea.

14. Rental Costs/Home Office

If you rent a physical location for your business, deduct your rent! You can also deduct all utilities and internet costs.

If you don’t have a physical location then you can deduct…

  • coworking facility fees
  • a percentage of your rent, if you use a room in your house/apartment exclusively for your business

Work from a cafe and have to buy a muffin and coffee to get access to the internet? Great, deduct it (see meals and entertainment).

15. Business Vehicle Expenses

If you own a vehicle for your business you can deduct all expenses related to owning that vehicle (registration, gas, maintenance, depreciation) or deduct expenses based on miles driven. Most software will guide you towards the best overall deduction based on your vehicle expenses/miles driven.

16. Interest Payments

Business credit cards, business loans.

17. Clothing

As a digital nomad or blogger, there is simply no possible way you can justify clothing purchases as ‘uniforms’, so don’t even think about it. If you can think of a reason, leave a comment. I’d love to here from you!

18. Conferences and Workshops

The cost for any event, whether a conference, workshop, or webinar can be deducted. Travel and food related expenses (if any) can also be deducted.

FAQ

I lost my receipts, or I live and travel in a location that doesn’t use them, can I still deduct business expenses without them?

Yes. Contrary to popular belief, you do not need receipts to justify a business expense. However, it gets significantly more difficult if you don’t have them. Your best bet is to always ask for one. Even if it’s a hand-written receipt, it’s better than nothing. If you don’t have receipts, and you made a purchase with a card, no big deal. Create an expense log by copying the transaction from your statement into a program like Excel and noting what the expense was for.

If all of your expenses are in cash, keep a log as well. Indicate when you last withdrew money from an ATM and log all of your purchases with that money. This way, a year from now you will have a paper trail of your expenses. When the IRS looks at your tax return, they won’t see a line item for $436 at the ATM, they will see your expenses itemized.

What if I purchase something or visit somewhere for business and for pleasure?

You don’t need to assess business expenses at 100% in order to deduct them on your tax return, you simply need to determine the “business percentage” and deduct that. For instance, if you purchases a Macbook for $1,000 and you only use it half the time for your blog, you can deduct half of the cost. If you fly back to the US for a friends wedding and spend 75% of your time with them, then deduct 25% of your flight, meals, and lodging accordingly.

Should I have a separate bank account and credit card for my business?

Yes, yes, yes. This goes back to Joshua’s story above. If you are ever questioned by the IRS, the first thing they are going to try and do is prove you are acting as a hobby and not as a business. If you maintain complete records and separate all of your expenses you will go a long way to showing business intent.

 

Disclaimer: This information is for American residents, and should not replace the advice of your own certified tax accountant. Please use it as a guideline only — and seek personalized help from a professional if you have questions. 

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