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tcrawford -> RE: Donations (6/6/2007 12:25:16)
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I'm not an accountant, and don't accept donations, but I am a part-time musician with a side income.
If you use PayPal to collect your donations, they will send you a 1099 form at the end of the year, which means the IRS knows about your income from them.
The simplest thing to do - just bite the bullet and include it in your income and pay whatever additional tax is required. IRS leaves you alone because they're happy.
The good news is that you can offset this income with the expenses required to earn it - that would mean your hosting fees, your computer costs, even the space you use for the operation if you want to go crazy. This means you'll need to keep track of every penny and be ready to prove what came in and what went out.
2 things to watch out for: you'll be tempted to take a loss (more 'business' expenses than income). You can only do that for a certain number of years before they determine that it's not a business, its a hobby and you can't deduct expenses any more. They call a business any venture that makes a profit, even occasionally. And, many will say that taking a lot of deductions etc. puts big red flags on your tax return and increases your chances of getting audited.
All that being said, more money is ALMOST always worth the extra hassle you go through to get it and keep it.
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