I feel like these arguments I'm hearing are nothing more than a careless and thoughtless application of law that doesn't apply to the situation at hand.
I agree.
I myself wouldn’t be so quick to make a personal/non-deductible judgement here. It is pretty common for people to jump into “their own business” without thinking it through. We all have seen it. It is also pretty common for folks to over-buy inventory. (Although what we have here isn’t “inventory for sale/resale”).
The tax laws do not, and should not, deny deductions for bad business decisions.
With that said, I do think the personal use element could be problematic. It’s kind of like medical residents: Are they primarily students that also work…or are they primarily workers that are also students? Is she buying the clothes primarily for personal use and is just so happening to blog about it or vice versa? (Think about the writer who writes about all those exotic destinations they visit – are they a traveler that just so happens to write or are they a bona fide writer who travels in pursuit of his or her craft?). And I can’t even say if “primarily” is the test here…just throwing it out there. It sure would help if she kept a detailed sheet for each article of clothing, wherein she jotted down when she blogged about it/reviewed it/posted a photo about it…etc. Any personal use should show up on those sheets as well. This speaks to the idea that a business maintains records. And she’ll want to be able to show copies of her (hopefully) extensive blogging efforts. And if you want my opinion, maybe the cost of those personally used items (and hopefully there’s not a lot of them) get removed from the tax return.
I think those detailed sheets would go a long way. And if it comes down to it, the taxpayer’s own testimony will be critical. If that testimony turns out to be not that credible, you’re in trouble. It might even be wise to sell everything, even if for pennies on the dollars, as opposed to donating to charity. This might lead one to believe that we are trying to recoup our investment to the greatest extent possible.
The other big issue is hobby vs. business. The IRS will assert that the taxpayer had no business plan, did no forecasting, did not consult with professionals, etc…which are things anyone should do if they are starting a business. Even if she didn’t do all that stuff formally, she can maybe make a showing that she did some empirical research that led her to believe it would be financially profitable. I’d also be interested in knowing about the taxpayer’s net worth. Often, these cases involve one big-earning spouse and a do-nothing spouse that “starts a business” that turns out to be nothing but a tax shelter. If this lady is single, that’s off the table, but maybe not wholly if she has a decent net worth.
In the end, we want to make a showing that this was just a bad business decision. And that might be revealed with this comment:
with the intent on quitting the FT job once the blog took off.
I also wonder if she established something like a 1-member LLC…
In summary, you have to really dig deep in a situation like this to flesh out the facts and the nitty gritty details and get them to point in your favor.
And if we have any Celebrity Bloggers out there (Nilodop?), I am available for interviews. Thank you very much.