This is a two-part series about two court decisions from the Ninth Circuit Court of Appeals regarding two commonly raised issues among bloggers of all varieties: taxes and free speech.
PART I: Blogging and Tax Write-Offs – this post covers the recent opinion from the 9th Circuit affirming the Tax Court’s denial of alleged business deductions of a part-time travel writer. (Oros v. Comm. of Internal Revenue, Case No. 12-71071 (9th Cir. 2013, Not for Publication)).
PART II: Blogging and the First Amendment – this post discusses another 9th Circuit opinion that places bloggers on level with traditional news journalists regarding First Amendment protections from defamation claims. (Obsidian Finance Group, LLC v. Cox, 740 F.3d 1284 (9th Cir., January 17, 2014).
See The World With Schedule C? Not So Fast!
Meet Mike. On December 17, 2013, Mike’s tax appeal in the Ninth Circuit Court of Appeals ended. The IRS won. But Mike’s story starts years ago when Mike had an idea in 2006, the same year his personal federal income tax returns started to draw the attention of the IRS.
Like many travel writers and bloggers (maybe too many if you ask someone like TravelBloggerBuzz), Mike thought why not take his passion for travel and photography outside his day job (full-time at Intel) and turn it into a profit-making book on his visits to South America, Australia, Asia and Africa! And his travel expenses will be deductible business expenses! Brilliant, right?! A taxpayer may be entitled to deduct “all of the ordinary and necessary business expenses in carrying on a trade or business.”
According to court records, in late 2006 and into 2007, using vacation and sabbatical leave from Intel, Mike (with no prior writing or professional photography training; a B.S. and MBA in international business administration) set out to document his travel with photos (4,542 taken in 2006 alone, wow!) and writings (travel diary, etc.). To this end, he produced credit card receipts and statements from his trip, but without business and personal itemization.
Mike’s “travel book” didn’t get far, or at least very quickly. As of March 2011, Mike had not published or completed his book about his worldwide trip, only composing about 100-150 pages, says the court (however, in his Appeal Brief, Mike states, “at the time of trial [his book] was in final pre-publication layout phase”). Nevertheless, Mike (upon the advise of an experienced tax return preparer… more on that later) included a Schedule C, Profit or Loss From Business, in his 2006 tax filings, which listed his principal business as “book author” (think: blogger!). He reported no business gross receipts or income while claiming $17,294 in travel expenses, $1,474 in meals expenses, and $372 in telephone expenses for a total loss of $19,140.
The IRS said – No – and Mike’s travel and meals expenses were disallowed (resulting in a $5,030 deficiency in Mike’s Federal income tax for 2006 and a $1,006 accuracy-related penalty). Mike appealed.
The Tax Court said – No (2012 opinion here). (However, the $1,006 accuracy-related penalty was reversed due to Mike’s reasonable reliance on an experienced preparer.) Mike appealed again.
The 9th Circuit Court of Appeals said – No (2013 opinion here). Mike failed to produce sufficient evidence to demonstrate his entitlement to claimed travel-related business deductions. So what WAS the analysis? Let’s look at what determines your “business” according to the courts.
Is Blogging Your “Business”?
Was Mike in the trade or business of being a book writer? The burden is on the taxpayer to prove he is entitled to any claimed deductions. A taxpayer may be entitled to deduct “all of the ordinary and necessary business expenses in carrying on a trade or business,” whereas most personal, living, or family expenses are not deductible. The Tax Court examines this question using three factors:
Is blogging really your “business”?
- Whether the taxpayer undertook the activity intending to earn a profit;
- Whether the taxpayer is regularly and actively involved in the activity; and
- Whether the taxpayer’s activity has actually commenced.
Yes, Mike could have a part-time business as a writer (blogger) along with his full-time marketing job. Even so, Mike would still have had (1) to meet his burden of proof that his claimed expenses incurred in connection with the trip were “ordinary and necessary expenses” and, if so, (2) substantiate them by adequate records or sufficient evidence of the amount, time, place, business purpose, and business relationship of the expenses, i.e. he may not make a “blanket claim” that all expenses while traveling were business related without the “who, what, when, where, how and why” for each and every claimed expense in relation to said business.
In affirming the Tax Court’s decision to deny the business expenses, the Ninth Circuit stated:
The Tax Court did not clearly err in determining that Oros failed to produce sufficient evidence to demonstrate his entitlement to claimed travel-related business deductions because Oros did not show that he was in the trade or business of being a book author. See 26 U.S.C. § 162(a) (taxpayer may deduct expenses for carrying on a “trade or business”); Comm’r v. Groetzinger, 480 U.S. 23, 35 (1987) (“[T]o be engaged in a trade or business, the taxpayer must be involved in the activity with continuity and regularity and . . . the taxpayer’s primary purpose for engaging in the activity must be for income or profit. A sporadic activity, a hobby, or an amusement diversion does not qualify.”); Sparkman v. Comm’r, 509 F.3d 1149, 1159 (9th Cir. 2007) (taxpayer bears burden of showing right to claimed deduction).
When the IRS expressly includes “writing” (read: blogging) as a red flag business (or hobby?) in its Tax Examiner’s Audit Guide (see page 11 here) for IRS Revenue Agents and Tax Compliance Officers, you know you’re behind in the count before stepping to the plate. Thus, seek professional CPA or tax advisory counseling before attempting to reduce your tax liability through such an endeavor.
Or just put the tax deductions idea aside and blog for … wait for it … fun!
Disclosure of Material Connection: Some of the links in the post above are “affiliate links.” This means if you click on the link and purchase the item, I will receive an affiliate commission.