research as a tax deduction

what counts and what doesn't?

[shinyblue]

If I write an AdSense website about a particular subject or topic, can I write off my activities in that topic as a business expense--"research"?

For instance, let's say I have a website about a certain craft, like widget making. I buy widget making supplies, I make widgets, I take pictures of the widgets that I made, write tutorials to put on my site, and then I end up giving the widgets to a friend because I have too many widgets by now anyway.

So obviously I could deduct things like the cost of the camera. But can I deduct the cost of the widget supplies too? What if I take a widget-making class where I learn a technique that I later use in one of the widget-making tutorials that I put on my site--can I deduct the cost of the class as a business expense?

I guess what I'm saying is, what stops someone from taking every hobby they have, putting up a website about it, slap on some ads, and then deduct all the expenses they have from engaging in that hobby as business expenses? As long as they are not taking a loss more than 2 out of 3 years, it qualifies as a business, correct? It seems like a great way to not have to pay taxes to purchase the things you enjoy playing with anyway.

One other slightly related question. What qualifies as the "same business" and what qualifies as a "different business"? If I have two different unrelated hobbies and websites, and for the first one I spend lots of money for "research" and don't make all that much off the ads, and for the second one I spend hardly any on "research" and make a lot of money off the ads--can I classify them both as one "business" - that is, the business of making content websites - and let the income earned on the second one balance out the expense spent on the first one, and thus avoid the "2 years of loss" limit on the first website?

(I hope everyone followed that.)

[Chapman]

These are all scenarios best presented to a tax accountant and probably not questions you should have answered by AdSense publishers.

Actually... I'm imagining that this thread may not be most appropriate here and could conceivably be moved.

My take on taxes has always been... Can I actually present this situation, with confidence and documentation, to the revenue agent when sitting across from him at an audit? If I'd feel comfortable... I do it, otherwise I don't!

Chapman

[ronin]

It seems like a great way to not have to pay taxes to purchase the things you enjoy playing with anyway.

Heh, yes it does. But it's not quite that easy.

I can't comment on how it works in the US - but for the benefit of people in the UK who are asking themselves the same question, business expenses can be claimed against tax only when they are wholly and exclusively incurred in the process of running ones business. I guess it's up to you how strict you want to be about this - is lunch with an industry colleague (who is also a friend) a business expense? (Really?)

[edited by: ronin at 7:42 pm (utc) on May 22, 2006]

[celgins]

Well, those types of questions will definitely be better answered by a tax advisor. For convenience, you could probably use HR Block's Online Tax Advisor service. I think the fee is like $19 and includes your questions and a phone/email answer. They also have an online, IM-based chat where they may answer you.

In reference to rules, the IRS does have tax breaks for those spending money researching and pursuing a hobby. Of course, they also have tax breaks for those spending money building, researching, or supporting a business.

You will have to look through IRS tax documentation for information on both of those.

[TheDonster]

You really have to consult a CPA for the exact breakdown on what you can claim for business expenses. For example, here in Canada I figured a computer laptop would fall 100% tax deductable as a business expense (my corp. is registered as ecommerce). But to my suprise, certain portions of company assets can only be claimed up to x percent per year. You really must get proper advice since 3 or 5 years from now, the taxman may ask for it all back - plus interest.

The other advantage is that a CPA will steer you towards tax breaks you may have never thought of, such as yearly company stockholders meetings in Hawaii, 100% deductable!

[LifeinAsia]

I could deduct things like the cost of the camera

You have to deprciate capital items.

As long as they are not taking a loss more than 2 out of 3 years, it qualifies as a business, correct?

Not exactly... See below.

It seems like a great way to not have to pay taxes to purchase the things you enjoy playing with anyway.

Which is exactly why it's NOT that easy. The "make a profit in x out of y years" is only a guideline.

The real key is if you are treating the business like a real business. Some determining factors:
- Are you seriously trying to make money with it?
- Do you have experience in similar business ventures?
- If you are losing money, are you changing the way you operate so as to make a profit in the future?

It all comes down to what happens if/when you get audited. You can cheat the IRS for years, but there are no consequences until you get caught.

As has been pointed out before, consult with a professional tax advisor. Most likely, he/she will recommend that unless you have the evidence to justify your venture as a real business, just treat it as a hobby. You can still deduct expenses- but you can only deduct expenses that don't exceed your income (in other words, hobbies can not generate a loss).