How to Earn Tax Deductions from Your Website

Howtoadvertise.net and the other websites under the Danifer.com umbrella have, until recently been hobby sites. They are designed and intended to earn a profit, but in general have been a second source of income at best. One of the huge and often overlooked aspects of running a profitable hobby business like howtoadvertise.net is the potential for tax deductions. Your business may not be able to turn enough profit to live on, but if it contributes to your personal income, it could reduce the amount of Federal income tax you are expected to pay.

Example

DieselEarth.com is a website devoted to using vegetable oil as an alternative fuel. It will soon celebrate its three month anniversary and has earned a negligible profit of under $50 since its creation. That's normal considering most websites take some time to earn even the smallest amounts of cash and don't start seeing serious returns for several years without any sort of paid-traffic catalyst.

Let's assume that DieselEarth is the only website I own and doesn't warrant space on my existing dedicated server. I would probably have to spend between $75 and $100 for webhosting as well as an additional $9 for the domain name. DieselEarth is run on the open-license software Wordpress and uses a free template, so there are no charges for the backend mechanics. My total investment for the year would be around $109 for a startup hobby business.

Now let's consider some of the tax ramifications that website might have:

Auto expenses and car payments on a diesel vehicle - deductions totaling around $1600 a year
Fuel system modifications to make the care vegetable oil friendly - $1000
Vegetable oil and diesel fuels for day to day analysis - around $1560 for the year
New laptop to write post to the site (50% of its use is personal, so we won't write off the whole thing) - $500
A small portion (10% use) of the year's existing internet connection - $50

The list goes on and is limited only to the theme of the site and the legitimacy of the deductions. All of the above would, in my opinion, be legitimate deductions for DieselEarth and would make it show a pretty serious loss for this year (if I were to file my taxes today) and I didn't even get into a home office scenario. Total loss would be about -$4660.

At a tax rate of 15%, that's $715.35 I won't have to pay to the government and can get back on my return. That savings would even cover an accountant's fee to itemize all the expenses and make the whole thing worthwhile.

At some point (three years I believe), DieselEarth will have to show a profit or be declared a hobby rather than a business. Since I fully intend on making it profitable by then it won't be a problem - $4660 a year is a perfectly reasonable yearly income from a well-run website. You should be aware of the legitimate hobby business if you're going into year three and still aren't making any money with your website. I'm not advocating for anyone to cheat the IRS, but instead to put a little effort in and use the tax code to your own advantage instead of the government's.

The example above could be applied in hundreds of ways. Why not take a look at your current lifestyle and where your money goes and take steps to start your own business based on what you already love to do? If you eat out a lot or love movies, consider a restaurant or movie review website. If you're into gadgets, start a "what's hot" gadget blog. The tax benefits are obvious if you do them properly and under the guidance of your tax advisor.