Historically, our staff Certified Tax Cat has handled readers’ questions about taxes, but he’s taking a leave of absence to campaign for the legalization of medical catnip. Filling in for him is Laura’s dad, a retired accountant and real live independent tax preparer. Exclusively on Consumerist, Tax Dad answers your questions.
Let’s kick things off with a question about web sites. Running them and making money from them, that is.
Hi, Tax Dad!
Thank you very much for sharing the benefit of your experience.
My tax question is about the difference between a business and a slightly profitable hobby.
I have a website with advertising. The maintenance/writing for the website takes about 1-2 hours a week and the advertising income in 2012 was $1,700.00 and for 2013 came out to about $2,400.00.
Last year, my tax software urged me to consider this as business income, but the math said I would have owed money, instead of getting the modest refund that I did. I know it’s going to come up again this year and I am not sure which way to report it. For something that I spend very little time on and only earns me a small fraction of my regular income, will I ever need to consider this business income?
Hi Catastrophe: Yes, it sounds as if your website is growing gradually, and you should probably treat it as a business. It gets more complicated, but essentially the IRS says you are running a business if it turns a profit in at least 2 of 5 years. If it is losing every year, you have a hobby, and not tax-deductible.
Firstly–and maybe your tax software walked you through this–but are you taking all the expense deduction you deserve for your business? Do you have a home office that you could write a portion of? Computer, printer, fax, related equipment used to generate this income? You could write off part or all of these.
Do you hire assistants, or outside services? What about software you use to maintain the site, or web hosting fees?
Check out a copy of IRS Schedule C and the instructions for more ideas. Even if you decide that it is a hobby eventually, you have 5 years to decide. Good Luck.
I bought a second house this year and am renting it to my son and daughter-in-law. Do I claim the rent as income and mortgage interest as expenses? How does this work?
Well, George, I am assuming that you bought the house with the intent of renting it out, so you know somewhat how it works.
The big question here for IRS is if you are renting to your son at a fair market value. If you have not done so, conduct some research on this and document it. If you are claiming a loss on the rental each year, it may be questioned.
Simply put, you would claim your rental income as revenue, and deduct from this interest on your mortgage, property taxes, annual depreciation calculated on the value of the house, and expenses YOU pay, such as utilities, furnishings, appliances, lawn care, trash pickup, improvements, etc.
Also know that any depreciation taken will have to be accounted for, or “recaptured” if and when you sell the home.
Hey Tax Dad,
Last year I had taken legal action against an ex for back rent and a loan for a down payment on a vehicle. I since have won a judgement of around $13,000 with 5.25% interest but they haven’t paid me a dime of it – and probably won’t because they are a bum.
Can I count this as a loss on my taxes?
Ah, ’tis the season (or climate) for bad debts.
Yes, IRS tells you that you may take a non-business tax deduction for a bad debt in the year that debt becomes worthless. A debt becomes worthless when there is no longer a chance that the amount owed will be repaid. If there is some chance that you will receive payments, you should delay write-offs.
To do this, you will need Form 8949 Part 1 with box C checked. Attach a statement to your return giving:
(1) a description of the debt, including amount and date due
(2) the efforts you made to collect the debt and
(3) why you decided it was worthless.
The results of your court decision should provide all these, except for (3). If there is a chance that you will see repayment, you can always delay and amend your return within the next 3 years. Good luck.
Dear Tax Dad,
Since it is strongly implied, though perhaps not specifically stated anywhere, that the purpose of taxes is to pay the government for doing its job… Is there any legal way to deduct a portion of my 2013 taxes owed for the 16 days in October when the government did NOT do its job?
I am sure many taxpayers would agree with your argument, and some would argue that government did not do its job for 365 days, but IRS courts would not listen. Government as usual.
Disclaimer: The nature of free advice is that you often pretty much get what you pay for. Questions answered in the “Ask Tax Dad” column should not serve as a substitute for consulting a tax preparer, accountant, attorney, or certified tax cat of your very own. Tax Dad regrets that he cannot offer advice privately over e-mail.
Have a question for Tax Dad about your federal or state tax returns? Send it to us at firstname.lastname@example.org with “ASK TAX DAD” in the subject line. We’ll run the answers as soon as we can get him to stop Photoshopping pictures of wild grouse.