Internet Marketing

2008-01-24 by

Today TaxMama hears from Jim in California who tells us. “I’m an affiliate marketer and have spent a lot more money on ebooks and courses than the amount of income I have generated. Are the ebooks/courses tax deductible? Under what category should I put these expenses?”

Dear Jim,

Making a fortune on the Internet looked really easy before you started, didn’t it?

Once you take the plunge and start to learn all about building a membership base, or a mailing list, to create sales pages and landing pages, to build appealing websites and to develop products, or to find the right products to re-sell or recommend, you suddenly come up for air – and months have passed.

You realize you’ve been buried in the whole process for months, selling very little as you learned the ropes. But, oh my goodness, you’ve spent thousands of dollars!

It takes a while to build up a profitable Internet presence. And if you scratch an overnight millionaire, you’ll find someone who’s invested substantial time, and often money, to get there.

How do you deduct all the learning costs? IRS looks at business education two ways.

1) Learning a new trade or business is not deductible as an employee. Is it deductible for a new business? No. Not before the business opens its doors and is ready to do business. Before that, it’s called “Start Up Costs”. And you can deduct up to $5,000 worth of start up costs in the first year you are in business, provided the business has started generating income before the year-end. (Or was open to start selling, but no one came to buy…)

We had a whole long discussion about this issue a while back. And the matter was clarified by Doug Thorburn, EA http://taxquips.com/index.php?id=255

Start Up costs come up again and again. http://taxquips.com/?id=304

These other TaxQuips will explain what do with your start up costs that are over $5,000.

So, in this case, report up to $5,000 on Schedule C, page 2, as Start Up Costs. Attach a schedule listing what those costs consist of – setting up the website, taking courses, learning copywriting, paying for initial artwork, etc.

2) Once the business has started, you can continue to learn to market it and develop it. Then it’s called Education. If the class has other qualities, like a membership arrangement, with information sharing among the members, you can call it dues. When the program sends you sign-ups or sends visitors to your site as part of the training, it’s advertising.

So look at what you’re really paying for to determine exactly where to take your deductions.

Now, enough about taxes. Let’s look at your spending. Do you really need to invest in every terrific education opportunity that comes along? Once you start, it’s like a addiction. The offers are designed to create a compulsion to buy. Why do you think Joe Vitale calls it hypnotic marketing? http://joevitale.com

Resist the compulsion to buy for a while and start to actually work your site. Implement the information you’ve already learned. Or read and implement the information you’ve already bought.

And until you start to generate revenue, if you must learn more about how to build your online business and market it, consider reading some of the excellent free material out there.

Ken Evoy is one of the most successful Internet Marketers out there – and has been here since the outset of the commercial Internet. Definitely a grand-daddy of online marketing and affiliate programs. Here is Ken’s complimentary Affiliate Masters Course
http://taxmama.com/EBooks/AffMasters.pdf

If you want to sell ClickBank-based products, THE guru in that industry is Harvey Segal. His definitive work on how to use ClickBank also costs nothing. Here is your Guide to ClickBank
http://www.supertips.com/sales.php?offer=taxmama&pid=16

Have a fabulous 2008!

And remember, you can find answers to all kinds of questions about Internet Marketing, and other tax issues, free. Where? Where else? At TaxMama.com

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Ask TaxMama
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www.TaxQuips.com
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TaxQuip #255
Start Up Costs Clarified by Doug Thorburn, EA
TaxQuip #304
Start Up Costs Discussion
Ken Evoy's Free Book
Affiliate Masters Course
Harvey Segal's Free Resource
Guide to ClickBank

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  1. douglass bodemann,ea Says:
    January 25th, 2008 at 10:40 am

    eva, since jim indicated his expenses exceeded his income, it appears he is up and running. therefore, he can a)deduct as you indicated up to 5k as start up expenses (lets assume he will not lose this option due to excessive start-up costs)and any amount in excess of 5k is then b)amortized for 180 months starting with the month he began business. this amount is listed on form 4562, part VI and carried over to his appropriate entity return. (its possible jim may have more than 5k in start-up costs deduction in his first year)
    should jim dispose of this business prior to the end of the amortization period, he can deduct the unused remaining costs on his final return. good luck, jim.

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