I Organize Book Giveaways for Authors. Don't Know Where to Deduct Prizes I Pay For.

[BookPromos]

This year I started a book promotions business. I organize group giveaways for independent authors to help them attract readers to buy their books, follow them on social media, sign up for their author newsletters, etc.

Readers come to my website where I'm hosting a giveaway for, say, 35 authors at a time. The authors pay me a fee, typically $10 to $15 each, out of which comes the cost of prizes, advertising, and my time. Every promo has a Rafflecopter, where readers can enter to win Kindles, gift cards, ebook prize packs, things like that. Typically, I will spend around $180 on prizes awarded to the winners. I'll also incur $25 to $40 for Facebook advertising, plus costs for the website, graphics purchased to design the promotion, that sort of thing, but what I'm concerned about here is where I deduct what I've paid for the prizes. I'm the one who buys them and awards them to the winners. They're not business gifts because they aren't discretionary items I give to people to thank them for their business. Nor are they promotional items with my business name on them like pens or mugs that are used for advertising. They're retail prizes and gift cards, the exact value of those prizes being stipulated in the giveaway form rules, and awarded randomly to whomever the Rafflecopter picks. A Kindle costs anywhere from $47 to $119 depending on the model I'm giving away. Gift cards are in amounts from $10 to $35. Ebook prize packs (where I buy the winner their choice of a set dollar value of ebooks from Amazon) run about $15 to $25 each. 

Where does this go on Schedule C? Thank you in advance for any help you can provide.

[Carl]

Here's how I would do this in your shoes. But don't take "my way" quite so fast. Give it time for others to post here. With your talk of "giving away" stuff, as well as a raffle of some sort, things very well may need to be treated differently for you, as there's another train of thought that tends to lead to "gambling winnings" on the raffle items. As the awarder of such winnings, I don't know how that would be handled on your tax return.

Basically, all of the times that you buy to "give away" would be inventory, and you would report it in the COGS (Cost of Goods Sold) section.

So your advertising cost would be reported as such in the business expenses section.

What you pay for prizes awarded would be reported in the COGS section.

Your time is not deductible, since the IRS can not tax time. So you can not deduct from taxable income, that which you are not taxed on in the first place.

[BookPromos]

Thank you, Carl. That's what I was thinking, too. The business is sort of a hybrid between service and product. I'll follow your advice, though, and wait to see how others chime in.