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Hobby or business? That's the costly tax question facing Philadelphia bloggers

In addition to cutting services, many cash-strapped cities are looking for new revenue sources.

One local levy that's catching a lot of online flack right now is Philadelphia's tax on bloggers.

The tax, which centers on whether bloggers are businesses or write online as a hobby, has gotten a lot of coverage, including at Mashable, Philadelphia City Paper, ComputerWorld, the Washington Examiner and Philly's NBC affiliate.

Paying the taxman for your hobby/business: From a federal tax perspective, hobby income is taxable.

It's reported on the "other" income line of Form 1040 and any expenses associated with the hobby can be deducted if you itemize by claiming them as part of miscellaneous expenses.

The problem with this deduction, though, is that to count on your Schedule A, the hobby costs (along with other sundry expenses) must be more than 2 percent of your adjusted gross income.

That's why if your hobby is making money, you need to consider whether it would be more worthwhile, at least from a federal tax perspective, to convert the hobby activity to a business.

Going the other way: And that's the point, in reverse, that bloggers at Hot Air and Going Concern make in regard to the Philadelphia blogger tax.

If you don't want to be considered a business by a taxing jurisdiction, don't assume some typical business practices. In this case, simply remove the ads from the blog.

"Maybe the city's tax is excessive, annoying, desperate for reform or just plain stupid but if you don't run ads on your blog -- that wasn't designed to make money -- you avoid the business privilege license altogether," writes Caleb Newquist at Going Concern in Is Philadelphia's Tax on Bloggers That Big of a Deal? "It's as simple as clicking a mouse and the government is out of your life (at least this respect)."

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