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For this episode of Driving with John Chow, I answer the question, do you owe taxes on money made online. The timing is perfect since it’s tax season.
The short answer is yes. If you make money online, the IRS will want their cut. For tax purposes, online income is treated as business income. If your Internet business isn’t incorporated, the income is added to your personal income and taxed at your marginal tax rate.
Because the income is treated like business income, you are allowed to deduct the related expense require to run your business. Stuff like web hosting, design work, programming, cost of domain renewal, email list, business travel, are all deductible.
There are no set rules on deductions. However, the expense must be reasonable and used for the purpose of getting business. The keyword here is reasonable. It’s an undefined term. What maybe reasonable to you maybe completely unreasonable to Uncle Sam. My rule when dealing with deductions is to claim everything because the worst thing that can happen is the deduction is disallowed. If they disallow it, then fine. However, if they accept it, then you saved yourself some money.
While coming up with creative deductions is nice, you must remember that you’re in the business to make money. This is not a tax shelter. The tax man will disallow any and all deductions if he thinks you’re never going to turn a profit. Running an Internet business has many tax advantages. However, those advantages don’t mean dick if it doesn’t make money. Even though you can write off that trip to the Affiliate Summit, you still have to pay for it first. Not an easy thing to do when the Internet business is making zero.