Personal Finance

9 Tax Questions Small Business Owners Are Asking

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Last Updated on February 27, 2024 by Carolyn

Word cloud with many of the tax questions small business owners are asking
Tax Questions Small Business Owners are Asking

One of the goals, when I started this blog, was to provide useful answers to readers’ tax questions. I can’t tell you how often I cringe when I see someone post a tax question on a Facebook site and receive several answers, with most of them being wrong. There certainly are a lot of armchair professionals out there!

In hopes of counteracting this promulgation of misinformation, I asked some fellow bloggers and small business owners to submit to me their tax questions and promised answers to them. Here are the tax questions small business owners are asking. For easy reference, I have categorized them by topic. 

Business Licenses

Questions on business licenses come up frequently in blogging forums. The good news is that most bloggers and side hustlers don’t need a business license to open a business. Here are some specific questions from readers:

An image of approved being stamped on a business license application
Do You Need a Business License?


Q. Cathy Diaz from Whywejournal.com

“At what point should a new blogger or side hustle business owner get the business license? Is it a certain level of income? This may be state-dependent but anything that spans across all states would be helpful.”

A. I discussed this topic in my post:  Questions about Turning Your Blog Into a Business

At the federal level, there is no “business license” required. At the state and city levels general business licenses to conduct business are not usually required for bloggers and most side hustles (licensing is usually reserved for professions and trades). However, be sure to check this Small Business License Requirement list provided by NOLO for the requirements for your state, and do inquire at your city office to be sure there are no further requirements.

If you sell products, you most likely will need to obtain a sales tax license (only 5 states don’t have sales tax). If you provide only services you may still have to obtain a sales tax license as some states do require you to charge sales tax on specific services. Patriot Accounting has a good guide to sales tax by state

If you do business using a fictitious name (a name other than your own), you may be required to register that name in your city, county, and state. Just having a blog with a name for example, Tucandream.com doesn’t require filing for a DBA. But say I want to turn Tucandream into a brand and use that name as the name of my business or to open a bank account, I would have to file for a DBA.

Q. Lauren Jenkins Brantley of Lashleydesign.com is a virtual interior designer and asks:

“”Do I pay sales tax for purchases? And how does that work for clients that are outside of my state?”

A. Laura, the answer to this question is it depends on what your purchases are for.  If you buy items to be used in your own business such as office supplies and software, yes you should be paying sales tax on those purchases.  If you are buying the product to resell you can apply for a sales tax exemption or sales tax certificate. Whether your client is in or out of state does not affect your sales tax purchase exemption.


What are My Tax Filing Obligations?

Lady with a confused look holding up various tax pamphlets
What are a Small Business’s Tax Filing Obligations?

Many bloggers aren’t sure if they are a business, or if they have any tax filing obligations. At what point are you considered a business? Do you need to file a separate tax return? Read on and you should find your answers.

Q Pet Zone.Blog 

I am US-based and started my blog in April of last year. I have set up a sole proprietorship LLC. For the 2023 tax year, I spent more on my businesses (including the blog) than I made. I expect that to change in the future, but what are my tax obligations (Schedule C, etc.) for the 2023 year? Also: am I a business or a hobby?

I’m glad you asked this question as I’m sure many readers are wondering about the same issues.

Let’s first discuss whether your activity is a business or a hobby.


Hobby or Business

Per the IRS:

“A hobby is any activity that a person pursues because they enjoy it and with no intention of making a profit. People operate a business with the intention of making a profit.”


“A hobby is any activity that a person pursues because they enjoy it and with no intention of making a profit. People operate a business with the intention of making a profit.”

That said, sometimes hobbies turn into a source of income but are they a business?

The IRS uses eleven factors in determining if an activity is a business or a hobby; all factors, facts, and circumstances with respect to the activity must be considered. No one factor is more important than another.

  • The taxpayer carries out activity in a businesslike manner and maintains complete and accurate books and records.
  •  The taxpayer puts time and effort into the activity to show they intend to make it profitable.
  • The taxpayer depends on income from the activity for their livelihood.
  • The taxpayer has personal motives for carrying out the activity such as general enjoyment or relaxation.
  • The taxpayer has enough income from other sources to fund the activity
  • Losses are due to circumstances beyond the taxpayer’s control or are normal for the startup phase of their type of business.
  • There is a change to methods of operation to improve profitability.
  • Taxpayer and their advisor have the knowledge needed to carry out the activity as a successful business.
  • The taxpayer was successful in making a profit in similar activities in the past.
  • Activity makes a profit in some years and how much profit it makes.
  • The taxpayer can expect to make a future profit from the appreciation of the assets used in the activity.

A taxpayer doesn’t have to meet all factors to be a business, but the intention to make a profit is a must. If you are monetizing your blog and making efforts to grow your readership, keeping financial records, and making profit-motivated decisions, you’ll most likely be considered a business.

What are my Tax Filing Obligations?

Federal

If you haven’t filed any business organization filings such as an LLC, Corporation, or Partnership, by default you’ll be considered a sole proprietorship and report your business activities on Schedule C of your federal personal tax return (unless you’re a farm wherein you’ll use Schedule F).  A single-member LLC is considered a “disregarded entity” and unless the member has elected to file otherwise, will also be considered a sole proprietorship. Refer to the IRS Publication 334 Tax Guide for Small Business for more guidance.


Fincen Reporting

Effective January 01, 2024, Beneficial Ownership Reports (BOI reports) are a new filing requirement for domestic and foreign companies. For FinCEN (Financial Crimes Enforcement Network) purposes domestic reporting companies are corporations, limited liability companies (LLCs), and any entity created by the filing of a document with the Secretary of State or similar office under the law of a state or Indian tribe.

Please refer to my dedicated post on the BOI filing requirements: New Beneficial Ownership Report Required by LLC’s.

State Filing Requirements

In most states, the state return for sole proprietors is derived from federal return figures with a few adjustments.

LLCs and Corporations are often required to file an annual return or franchise tax return. Find out your state’s requirements at NOLO:  State Guide to LLC Report and Tax Filing Requirements.

Other Possible Required Filings

If you pay individuals to perform services for your business and pay them over $600 you may need to issue them a Form 1099-Nec. I discussed filing requirements for forms 1099-NEC in my post: Essential Small Business Tax Tips. 

What Can I Deduct?

IRS document with a balance due crossed out and a lower balance due after deductions
Knowing what deductions to take can minimize your tax liability

Another popular tax topic amongst small business owners is “What Can I Deduct”.  We all want to minimize our tax liability and if we have losses we would like to at least be able to benefit from them as a tax deduction.

Q. Ronda Layton Rainey of Beautifullyover40.com asks:

“I hope I am asking this question correctly. Can you let me know how to avoid wasting money on things that can’t be deducted from a home-based business? For instance, I have a blog. Is it worth it for me to invest in expensive courses, software and/or computers?”


A. This is a frequent question I receive from my small business clients. I always respond:

“ It doesn’t make sense to spend $1 to save $0.25. “

Business courses, software, and computers are all deductible in one way or another, but let’s use an example to see how these expenditures will affect your tax liability.

Example of How Expenses Affect Your Tax Liability

Facts:


Ronda is considering taking a course that costs $100.00.

Effective tax rate: Ronda didn’t say where she lives or what she earns so let’s make some big assumptions and say she lives in Florida, is single with no dependents, and is successfully netting $50,000 a year from her blog, and has no other sources of income.


Tax Bracket: In 2024, any income earned by Ronda over $47,150 will be federally taxed at 22%. Lucky for Ronda Florida doesn’t have a state income tax. She will also have to pay a 15.3% self-employment tax on her earnings.

Net Cost of the Course and Tax Savings Calculation

Take the course cost and multiply it by your effective tax rate (combining both Federal and State rates and self-employment taxes) to obtain the true cost to you or how much your tax liability will be reduced by taking the course.

Ronda’s effective tax rate will be 22% (federal) +15.3%(self-employment)=37.3% effective. At Ronda’s income level, every incremental dollar she earns will incur $0.37 in tax and vice versus she will save $0.37 in taxes for every dollar she spends on deductible expenses.

The net after-tax cost of this course is:

Course Cost$100.00
Federal Tax Savings @ 22%-$22.00
Self-employment Tax Savings @ 15.3%-$15.30
Net After Tax Course Cost$62.70
Calculating the Net After-tax cost of a course

Ronda can now decide if paying $62.70 for the course is worth it to her. Knowing the after-tax cost of your business purchases is essential information for making a sound business purchasing decision.

Q. Ben Adler 

“One question I have is if my cellphone can be a business expense as I use it for social media management and videos.”

A. Yes you can deduct your cellphone service as a business expense. If it is your only phone be sure to be reasonable about what % you allocate to the business. You can also deduct the cost of the phone ( either an expense or via depreciation depending on the cost), applying the same %.

Q. Meridith Wesley Brodeur of Travelthingsonpoint.com

“Hello!  I started a travel blog in 2023.  I am interested in learning more about what aspects of my travel costs count as a business expense.  “

A. Meridith, this is a good question, as the waters around travel blogging expenses get pretty murky when trying to determine how to separate business expenses from personal expenses.

Per the IRS to be deductible:

“ A business expense must be both ordinary and necessary. An ordinary expense is one that is common and accepted in your field of business. A necessary expense is one that is helpful and appropriate for your business.” 

In addition, when considering travel expenses, the IRS states

“You cannot deduct expenses that are lavish or extravagant, or that are for personal purposes.”

So what is reasonable? I would look at how much income you might generate from the travel expenses and what the primary purpose of the trip was.

For example, let’s say you go to a 2-day bloggers convention in Hawaii and opt to stay 2 days longer to gather material for your blog and enjoy Hawaii. You incur the following costs:

Round Trip Airfare$1,000
Convention Fee$300
Taxis, Shuttle$150
Meals$200
Which of the above expenses are deductible for this small business?

What of the above are deductible?                           

Airfare: I would deduct 100%. The fact that you stay additional nights doesn’t increase the airfare.


Hotel: I could argue for 2 nights as a deduction, depending. on 3 depending on available flight times. The second 2 nights may be debatable. If you write several blog posts from experiences savored over the next 2 days that have the potential to generate a few hundred dollars of revenue, I would deduct them. If you just visit the beach and enjoy Hawaii and don’t write profit-generating material, don’t deduct them.


Convention fee: 100% deductible

Taxis, Shuttle: I would deduct taxi to the hotel and airport. The other ones would be dependent on where you were going and if they relate to experiences that might generate revenue. 

Meals: The IRS only allows you to deduct 50% of meals while traveling. I would deduct meals for night of arrival, while at the convention and then look at the profit-earning potential of the meals incurred over the next 2 days. If you write reviews about the places you ate at that boosts the credibility of deducting them.

Q. Christine Leibbrand of deptofadulting.org

One thing I was wondering as I was filling out my taxes this year, how do I know if I can deduct office expenses like internet or office supplies if I also use them for personal use? Thank you for your great help!

A. For something like internet service I would claim the approximate % of the service you use for your business ie if you use it 50% of the time for business, claim 50% of the cost. For office supplies if you purchase items for the business like computer supplies, pens etc I would deduct them forin the business. 

Gale Langley

Q. I’m a tutor.   I used to be a classroom teacher.   Every time I do my taxes and and put down something I bought for my tutoring business, like books or curriculum or manipulatives, I think about how teachers can’t count things they buy for there classrooms on their taxes (actually, I think they can list a small amount now, but not everything…I haven’t checked but remember seeing something about that in the news).  

I wonder though, if a teacher tutored over the summer, and if she used some of the stuff she bought for her classroom (not stuff that’s used up, but things like math games and books), if she ALSO used that in tutoring, or if she bought it first for tutoring and then also used it in her classroom, can she deduct that on her taxes?



A. The answer to this question is very similar to my previous answer to the question on deducting internet and office supplies.  If you purchase something perhaps to use personally and then end up using it in your business you can claim the expense. You must remember to keep your receipts to support the deduction.

Under current tax law, educators can deduct up to $300 of any unreimbursed business expenses for classroom materials, such as books, supplies, computers (including related software and services), or other equipment that the eligible educator uses in the classroom

Social Security

Do you know that the self-employment taxes you pay on your federal tax return are your contributions to Social Security and Medicare? They are double that of an employee because you are considered the employee and employer and therefore are paying both shares.

Q. Memos and Moments

A question from a Baby Boomer generation. If you start collecting your Social Security but still continue to produce an income (and pay Social security taxes) is the Social Security part of your taxation lost forever, or it will add be added to your benefits.

 · 

A. You may or may not see an increase in your Social Security benefits. Social Security uses the average of your 35 highest-earning years as the basis for your benefits calculation. If your current earnings are higher than one of the 35 prior years, this earning year will replace the lowest earning year, and thus boost your average and your benefits. If it’s not, your benefits will remain unchanged.

Only the Tip of the Iceberg

The above questions are just the tip of the iceberg when it comes to tax issues related to blogging and small business. Tax rules are complex and ever-changing. What is the best way to keep abreast of changes that might affect you and your business? I’d suggest subscribing to tax newsletters that will bring you timely updates, joining your local chamber of commerce, subscribing to the IRS Tax Tips, and of course, hiring a CPA with expertise in your business for a professional consultation to answer your questions.

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