A "donation" received for a product or service is income.

June --

I'd like take the whole question of hobby vs business and turn it on it's ear. I'm considering starting a side business which will offer computer software for free but accept donations. Using the guidance in your book, it seems to fall into the hobby category, mainly due to a lack of profit motive.

So the question is: Can my received donations be taxed and if so can I deduct expenses?

Thanks, Fraser from Colorado


Dear Fraser,

Be careful. Instead of turning something on its ear you could end up on your rear!

If you don't have a profit motive, then it's not a business and you may deduct certain expenses only up to the amount of income. The expenses are not a direct deduction and so they may end up giving you no actual deduction at all.

The "donations" are fully taxable to you as income. Something is a "gift" and not taxable as income only when the giver gives of his or her own free will and gets nothing in return . Not so in your case. The giver is getting software.

Stay upright!
June