AdSense revenue on a personal web site?

[Arthur Rubin]

Is it earned or unearned? I've received mixed answers, even on tax professional boards, and I thought I ask here, as many of you are more web-aware than most tax professionals.

I mean, if it were on a business website, it would obviously be business income, but, on a personal web site? I think I could justify it as an intangable rental, which would probably be miscellaneous income, but, any other arguments?

[Famspear]

Is it earned or unearned? I've received mixed answers, even on tax professional boards, and I thought I ask here, as many of you are more web-aware than most tax professionals.

I mean, if it were on a business website, it would obviously be business income, but, on a personal web site? I think I could justify it as an intangable rental, which would probably be miscellaneous income, but, any other arguments?

Interesting question. Quick & dirty answer:

There are different possibilities. Let's say that you are an individual. There are several reasons that you could be operating the website. Here are just some:

1. As part of an unincorporated "trade or business";

2. In an unincorporated activity "for the production of income", but not in connection with a "trade or business";

3. As a hobby.

If you're an individual operating the web site as an unincorporated trade or business, then the advertising revenues you realized in connection with advertisements posted on your web site would seem to be Schedule C revenues (earned income). To the extent that your total revenues from the business (ad revenue and all other revenue in the business) exceeded your related business deductions, you would have "net earnings from self employment." This net figure would carry over to the front of Form 1040 and would be included in the computation to arrive at "taxable income," for regular federal income tax purposes. ALSO, the same amount, with adjustments, would be subject to the federal self-employment tax (SE tax). Note: I'm over-simplifying here. Also, half the SE tax would be deductible in computing "taxable income" for purposes of computing the regular federal income tax.

If you're an individual operating the web site as an unincorporated activity for the production of income NOT in connection with a trade or business, the revenues would be considered "unearned income." Regular income tax applies, but not the SE tax.

If you're an individual operating the web site as an unincorporated hobby activity (really, really, really honestly just a hobby), again, the revenues would be considered "unearned income." Regular income tax applies, but not the SE tax.

If the web site is operated by a corporation instead of an individual, the answers may vary. (For example, a corporation would not have SE tax.)

[jkeeb]

Earned vs Unearned is a question of facts. One of those preponderance of the evidence issues that can usually result in several pages in tax court opinions. Section 1.183 deals with profit motive and possibly the Self-employment tax or FICA tax sections deal with earned/unearned. When I dealt with the situation at IRS I would generally read court cases which would never be on point. Interestingly, a lot of the cases had to do with prostitution and mistresses.