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Adsense as Passive Income. Current Thoughts?

Adsense as Passive Income

     

sailorjwd

9:34 am on Oct 16, 2009 (gmt 0)

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For USA advertisers: Are any of you declaring adsense income as passive income on your tax returns?

I have two accountants I've talked to and I get different decisions for each. I'm trying to get confidence to declare adsense as passive income.

Note that some websites don't lend themselve to passive income since they require daily care and feeding for things like product reviews, blogs, price comparisons, etc.

If you don't think a fairly static website qualifies then please say why.

Thanks.

HuskyPup

10:20 am on Oct 16, 2009 (gmt 0)



I'm not in the USA and wondered what you were referring to since I've never heard this term before therefore I used Wikipedia to check it out and it implies that Internet income could:

In such cases, even a relatively modest income, together with frugal lifestyle, might be sufficient enough to form a basis for a viable passive income model.

[en.wikipedia.org...]

Maybe it could be a good starting point to present to accountants and the IRS?

Is there any difference with the tax level with passive income?

sailorjwd

11:46 am on Oct 16, 2009 (gmt 0)

WebmasterWorld Senior Member 10+ Year Member



Thanks for that wiki link but i take it with a grain of salt.

In the USA passive income, like dividends on stocks, are taxed at a lower rate than regular wages income.

I'm hoping some folks here has been declaring adsense as passive income successfully.

sonjay

12:07 pm on Oct 16, 2009 (gmt 0)

10+ Year Member



The IRS page on the topic specifically states that stock dividends are not passive income.

The IRS page doesn't specifically address AdSense-type income, but I'd bet dollars to doughnuts you'd get slapped down if you tried to claim it as passive income. It really doesn't fit either of the definitions the IRS uses for passive income.

Edge

12:19 pm on Oct 16, 2009 (gmt 0)

WebmasterWorld Senior Member 10+ Year Member



In the USA, passive income could be revenue from rental property, limited partnership or other enterprise in which he or she is not actively involved.

I have both rental property income and adsense income. There are diffrent tax write-offs available for each revenue stream, however at the end of the day the net income is taxed the same.

sailorjwd

12:28 pm on Oct 16, 2009 (gmt 0)

WebmasterWorld Senior Member 10+ Year Member



Edge,

I thought that you don't pay the social security and medicare on passive income.. for a self employed person that can amount to 15%

correct?

sailorjwd

12:30 pm on Oct 16, 2009 (gmt 0)

WebmasterWorld Senior Member 10+ Year Member



Sonjay, If that is the case then someone needs to correct the wikipedia page referenced on 2nd post.

sonjay

12:34 pm on Oct 16, 2009 (gmt 0)

10+ Year Member



sailorjwd, there's nothing to stop you from correcting it if you're concerned about it.

But when it comes to things that can get me in trouble with the IRS, I tend to ignore Wikipedia and go with what the IRS says. Have you checked with the IRS on this question?

sailorjwd

12:51 pm on Oct 16, 2009 (gmt 0)

WebmasterWorld Senior Member 10+ Year Member



Sonjay, I've tried to read the irs rules several times but get stuck and confused often. I do see this one statement about what is NOT passive income:

"Any income from intangible property, such as a patent, copyright, or literary, musical, or artistic composition, if your personal efforts significantly contributed to the creation of the property."

I wonder if website content is considered an intangible property? I guess articles on websites might be considered 'literary composition' ?

purplecape

1:45 pm on Oct 16, 2009 (gmt 0)

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To me, AdSense income is very similar to royalty income, which you earn from books you've written. I don't see how you could successfully claim it is passive income.

maximillianos

3:08 pm on Oct 16, 2009 (gmt 0)

WebmasterWorld Senior Member 10+ Year Member



I'm curious about this too. I'd gladly stop maintaining my site (it runs itself pretty much) if I could save a boat load on taxes... =) Re-focus my energies on a new site.

dcheney

4:12 pm on Oct 16, 2009 (gmt 0)

WebmasterWorld Senior Member 10+ Year Member



Frankly tax law for to "passive income" relating to websites is not a settled matter. The laws predate ideas like "AdSense" by a good bit and to the best of my knowledge there has not yet been a tax court case relating to this issue.

As with all such technical matters, it is best to consult a tax accountant and/or attorney.

sailorjwd

5:34 pm on Oct 16, 2009 (gmt 0)

WebmasterWorld Senior Member 10+ Year Member



Dcheney.

I consulted two tax accountants. One says yes the other says no. At the moment the accountant I'm using is the one saying no. I'm tired of asking him Why? and him saying 'Because'. But I'm afraid to make the leap so far with out more confirmation. And as you said, it hasn't been settled yet so I guess there isn't any possibility of confirmation either way at this moment.

sailorjwd

6:21 pm on Oct 16, 2009 (gmt 0)

WebmasterWorld Senior Member 10+ Year Member



I just spoke to the IRS. (grab grain of salt).

IRS immediately comes to the conclusion that we are getting paid for the content that we created (and therefore not passive). That's the gray area since it can be argued that we are not getting paid for the content, we are getting paid for the advertisements.

If you steal other people's content then I guess the income would be passive :)

purplecape

7:51 pm on Oct 16, 2009 (gmt 0)

WebmasterWorld Senior Member 5+ Year Member



One of the problems with this idea is that if you aren't paying INTO Social Security, you don't get SS paying OUT to you when you retire. Of course, if you have enough money not to need Social Security, or you aren't planning on retiring, this isn't a problem.

sailorjwd

8:33 pm on Oct 16, 2009 (gmt 0)

WebmasterWorld Senior Member 10+ Year Member



Purplescape...
No problem with SS. Adsense is a minor part of my income. I run a consulting business as main occup. Also, I'm due for retirement soon so I want to get this established before I back off on the consulting biz.

By the way. I called IRS again and said I provide google with space on my website to display ads under google's control. Google sends me a check every month for a portion of the money they make. Answer is: sure, that is passive income.

note that you can't have much in the way of w-2 wages when you attempt to collect social security!

purplecape

3:05 am on Oct 17, 2009 (gmt 0)

WebmasterWorld Senior Member 5+ Year Member



Interesting. I'm going to research this some more. AdSense income is not my main income either, and I've been reporting it as self-employment income. But if it's not...

purplecape

3:08 am on Oct 17, 2009 (gmt 0)

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Did you see this page on the IRS site?

[irs.gov...]

Seems to suggest that if Google is reporting it on a 1099 it can't be claimed as passive....

sailorjwd

10:16 am on Oct 17, 2009 (gmt 0)

WebmasterWorld Senior Member 10+ Year Member



purplescape,

In the link I believe they refer to examining the 1099 to make sure the income isn't from 'personal services'. I can't even speak to google let alone give them a personal service of any kind :)

As I mentioned before, my current point is that as long as we are not getting paid for the content on our site directly (that would be income from a literary work) then it would be passive income. We are getting paid for the advertising revenue from the ads google places (not needing our control or management).

The other slightly sticky point is: is the income from a related (w-2) business. My other business (consulting) is completely independent from the advertising and each would not be affected if either one did not exist - therefore they are not 'related'. my consulting business existed for many years before adsense arrived.

back to the 1099, my accountant says it has nothing to do with it since generally you get a 1099 for just about every non w-2 income. I think the important thing is that we don't receive a w-2 from google.

sailorjwd

10:23 am on Oct 17, 2009 (gmt 0)

WebmasterWorld Senior Member 10+ Year Member



back to Sonjay: you are right, but the point is you don't pay medicare and social security (15.3%) on dividend income, am I right on that?

Jobin

12:24 pm on Oct 17, 2009 (gmt 0)

5+ Year Member



sailorjwd
"IRS immediately comes to the conclusion that we are getting paid for the content that we created (and therefore not passive). That's the gray area since it can be argued that we are not getting paid for the content, we are getting paid for the advertisements."

If the IRS person knew what Adsense was about they would realise they were wrong. What if you did not have adsense or any sort of paid advertising on your website would you receive income? NO.

sailorjwd

2:10 pm on Oct 17, 2009 (gmt 0)

WebmasterWorld Senior Member 10+ Year Member



Jobin,

I'm not sure what you point is. Could you explain a little further please?

Just to clarify - I do get income from the website indirectly because it provides me with clients for my consulting biz - that was the purpose for which the website was created. Not sure if that matters to your point.

purplecape

2:45 pm on Oct 17, 2009 (gmt 0)

WebmasterWorld Senior Member 5+ Year Member



Sailor,

Thanks for the further clarifications re 1099s and such. I posted the IRS link to make sure I understood...

The other slightly sticky point is: is the income from a related (w-2) business. My other business (consulting) is completely independent from the advertising and each would not be affected if either one did not exist - therefore they are not 'related'. my consulting business existed for many years before adsense arrived.

I have a somewhat similar situation, but I may not be able to claim such a separation. My web site functions both as the online home of my business, and as an informational site earning AdSense income. The two incomes streams are entirely separate--the business has a sort of mini-site within the site with no AdSense on it--but that might be a hard case to make.

I'm going to look into this some more but I'm not sure I can make this case.

annej

8:11 pm on Oct 17, 2009 (gmt 0)

WebmasterWorld Senior Member annej is a WebmasterWorld Top Contributor of All Time 10+ Year Member



My DH just pointed out you might have a hard time claiming deductions on equipment and expenses if you are claiming it's passive.

sailorjwd

8:27 pm on Oct 17, 2009 (gmt 0)

WebmasterWorld Senior Member 10+ Year Member



annej,

I have tons of deductions and they all go against the consulting biz/company. Currently the adsense is going into another company but one is owned by the other so I'm switching my adsense back to my personal account so I can receive it directly under my ssn.

I'm trying to get this all straight for next year.

sailorjwd

8:29 pm on Oct 17, 2009 (gmt 0)

WebmasterWorld Senior Member 10+ Year Member



Perhaps i should make it so the publishing company runs the website for the consulting company..hmmm so it has something to do.

Although if adsense continues to go into the toilet all this may be mute.

Elsmarc

8:54 pm on Oct 18, 2009 (gmt 0)

10+ Year Member



I wonder what the odds are that a claim of passive income would trigger an IRS audit.

Yes, I did read sailorjwd's post where the IRS said it would be passive income, but I don't particularly trust what an IRS person says on the phone. Reality is in an audit.

maximillianos

12:56 am on Oct 19, 2009 (gmt 0)

WebmasterWorld Senior Member 10+ Year Member



IRS immediately comes to the conclusion that we are getting paid for the content that we created (and therefore not passive).

What about user-generated content? I don't generate the content for my site. Wonder if that changes things in my favor?

sailorjwd

1:41 am on Oct 19, 2009 (gmt 0)

WebmasterWorld Senior Member 10+ Year Member



Maxi,

Content is a sticky issue. Are we selling content to google? No.
are we getting royalties from the content? No. When I called IRS back and didn't mention 'content' and just mentioned providing google with 'space' they said it was passive. But it is hard to seperate content form adsense. But you and others have special cases that may pass the sniff test. You provide the structure (basically a one time setup) for other people to add information.

jhood

10:09 pm on Oct 21, 2009 (gmt 0)

10+ Year Member



Advertising revenue is not passive income. If you wanted to spend a decade or two in court, you might be able to have it declared as such. Then again ...
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