U.S. Tax reporting for Pen Hobbies

[smik]

As you fill out those taxes here's a little mood music .

https://www.youtube.com/watch?v=YtksJEj2Keg

 

[Smitty37]

In general, blanks that you intended to make a pen from and sell (that pen) are not deductible until the pen is sold. Until a blank is sold whether resold to another party or turned into whatever, it is considered inventory (an asset) and therefore, not deductible.
In general, inventory does not become a business expense until is sold.

If if are selling inventory (or making pens) purchased years ago, you can assign a value to it based on what you think it is worth (based on some external source) or what you paid for it (historical cost) when you purchased it. Usually the safest option is to use what you paid for it. Again, this is all in general.

Not that Dave needs me to validate his advice, but all that he has said agrees with my education, training, and experience. In fact, I don't actively practice tax prep, so I am sure Dave and his wife are better equipped to answer than I am.

You are right that in general inventory is not an expense until sold but the way it is accounted for differs depending on whether you are a hobby business or a for profit business and also whether you use the cash or accrual method of reporting. For a hobby business you're totally correct. You need not ever take a physical inventory of anything. You can't write off obsolete, stolen or damaged inventory.

A Schedule C business using the cash method uses expenses the cost of inventory when paid for and it goes into the cost of goods sold....unsold inventory added during the year is then subtracted from the cost of goods sold on January 1st when usually you take a physical inventory. It has the same effect but you need to take a physical inventory (there are some exceptions). The inventory is carried forward every year.

Also, a Schedule C business can write off obsolete, damaged or stolen inventory and there are a number of different ways to do this.

In some cases 1040C EZ will work for you and save you a lot of headaches...that is if your business is small enough, less than $5000 in expenses and reporting a profit, but still qualifies as for profit. I personally think many business are better off to go this route than as a hobby. I don't think the IRS is likely to question you and you don't have to worry about inventory.

 

[endacoz]

What do most people use to record all this in and our $$

 

[lyonsacc]

What do most people use to record all this in and our $$

My suggestion would be whatever works best for you.

1) Get a legal pad and use a different page for each "category" of expense you want to track.

2) Get a bunch of envelopes and label each one for different expenses, then collect your receipts in the envelopes - and add them up at year end.

3) Or put all receipts from 1 month in an envelope and at the end of each month add up the totals of the different types of expenses and write them on the outside of the envelope. That way you don't have a huge pile to deal with in January, just a few smaller ones.

4) Build an excel spreadsheet (my preference for my pens and small businesses)

5) Software like Quicken that is a glorified check book will keep track of expenses for you.

6) If you are really serious and have a lot of activity try a bigger accounting software like QuickBooks.

I usually recommend people start with the simplest form that works for them, then to move up a step when that becomes too cumbersome. I am slow to recommend accounting software to people. For it to work correctly the user needs to have a decent understanding of how accounting works or you can create a bigger mess than you started out with.

I hope that answers at least part of your question.