US Tax Considerations- Blogging on Steemit: For Profit Business Activities

In the prior articles I have written on US Tax considerations, we learned how to value the US Dollar income received from STEEM and Steem Based Dollars and we learned how to calculate the capital gain (or loss) from exchanging STEEM and Steem Based Dollars for US Dollars. We have also discussed reporting requirements if you hold your STEEM and Steem Based Dollars in foreign crypto exchanges, discussed in a very general overview how the IRS determines if you are engaged in a for profit business or just a hobby and in the most recent blog, we have discussed loss limitations on not for profit activity- hobbies.

We discovered in the last article, having our blogging business reclassified as a hobby opens us up to some loss limitation rules which could have a very serious negative impact. Suppose we decided to follow the advice given in pervious articles about staying within a general framework of the Nine Factors the IRS Uses to Determine if it’s a Business or Hobby (https://steemit.com/tax/@lpfaust/us-tax-considerations-blogging-on-steemit-business-or-hobby-how-the-irs-determines-it). What are the differences and benefits of having our blogging business activity viewed as for profit instead?

Let’s take a closer look in a very general way…

But First, The Required Legalese…

Any accounting, business or tax advice contained in this communication, including attachments and enclosures, is not intended as a thorough, in-depth analysis of specific issues, nor a substitute for a formal opinion, nor is it sufficient to avoid tax-related penalties.

For Profit Business Activities Revisited (Differences)

As we discussed in previous blogs, the real difference centers, not around income, but around permitted “ordinary and necessary” business deductions.

Two key (and related) differences of for profit business activities as opposed to not for profit activities (hobbies) are: (i) the ability to generate business losses when permitted expenses exceed gross income, and (ii) net operating loss carrybacks and carryforwards.

Again, this some dense subject matter, so we will be taking a very general overview.

For purposes of this discussion, we are limiting the scope of this to Sole Proprietorships and Single Member LLCs who have chosen to be taxed as a Sole Proprietorship. Both of these entities would be required to file a Schedule C.

Business Losses

Unlike not for profit activities (hobbies), permitted expenses taken are not limited to total gross income. Ordinary losses are fully deductible. The distinction of “ordinary loss” refers to losses related to expenses which fall under the “ordinary and necessary” definition (think operating expenses) as opposed to “capital losses” which stem from things such as investment, asset purchases and disposals (think properties, crypto, equipment, etc.)

For example, if we have for profit business activities which generated $10,000 in gross income and had permitted expenses of $15,000, we would record an ordinary loss of $5,000. Not for profit activities (hobbies) could only take $10,000 of expenses because permitted expenses taken for tax purposes cannot exceed gross income.

Net Operating Loss (NOL) Carryback and Carryforward

For purposes of this article, I will not get into the specifics of how an NOL is calculated, but I will discuss how NOL carrybacks and carryforwards work.

In some cases, it is possible the loss generated by the business is so great, that it far exceeds the taxable income of the taxpayer for the filing year, and a Net Operating Loss (NOL) is generated. Generally speaking, when an NOL is generated, it may be carried back over the prior two years to generate an immediate refund from the IRS.

If the total NOL has not been used after applying it to the prior two periods, the remaining NOL is carried forward for use in future years. It is possible to waive the two year carryback if the taxpayer is so inclined.

Wrapping it Up

The benefit of having our business activity viewed as for profit cannot be understated. The fact we are able to both generate a loss and by extension, possibly generate a Net Operating Loss (NOL), which can generate an immediate tax refund from the IRS is a tremendous advantage.

Now that we have covered income, not for profit business activity and for profit business activity, the next installment we will look a bit deeper into the “ordinary and necessary” designation, then begin looking at specific deductions.

Have a tax question? Please feel free leave a question in the comment section below and I may feature it in a future blog post.

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