Anybody doing a 'hobby business?'

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Dan Masshardt

Dan Masshardt

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Joined
Jan 30, 2013
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Mechanicsburg, PA
So I've been turning this last year - offering some pens for sale to friends and upon request etc. Taking the few dollars to buy some more pen kits etc.

I'd like to sell a little more than this - not to derive income per we but to further the hobby.

But I hate detailed book keeping - it takes all the fun out. I don't mind paying taxes on whatever small income there may or may not be, and I don't want to break the law.

Are any of you reporting 'hobby income' without setting up all sorts or business stuff etc?
 
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Yes - to the question regarding hobby income. But, I also have a sales tax permit and charge and pay sales tax.

Respectfully, questions like these belong in the Marketing forum where the topics are not readable by guests.
 
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hilltopper46 said:
Yes - to the question regarding hobby income. But, I also have a sales tax permit and charge and pay sales tax. Respectfully, questions like these belong in the Marketing forum where the topics are not readable by guests.
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Good point. I didn't remember that certain things were hidden from guests and wasn't sure as it's not about marketing items per se, but that sounds right now that you say it. Maybe a moderator will move it if that's where it belongs.

That's what I'd like to do. Collect sales tax and report little income as hobby status.
 
The distinction between hobby and business in the eyes of the IRS is determined by whether or not you make a profit in 3 out of the last 5 years. Those numbers may have changed in the last 10 years or so, but the principal is still the same. If you did make a profit in 3 of the last 5 years, it's a business, if not, it's a hobby. That distinction is significant because the IRS will allow you to offset business losses against other ordinary income, but will not allow you to offset hobby losses against other ordinary income. That means that you can't make uses of losses from a hobby to reduce your income from other sources. However, they're more than willing to accept payment of taxes on any income you earn from a hobby. Reporting either business or hobby income on your federal tax return is the same, you would use a schedule C.

Sales tax is a totally different animal. Each state has it's own set of rules and regulations pertaining to remitting sales tax to that state. You could most likely just go to your state's website and find all the information you need there. I'm in Maine, and unless you collect sales tax above a certain threshold, you aren't required to obtain a sales tax id number from the state and remit quarterly or monthly or whatever. I can just report sales tax on my state income tax return. I usually don't have to deal with that because I sell most of my pens through a watch shop and they collect the sales tax from the customers. Since I'm selling to someone who is ultimately going to resell to customers, I'm not required to report sales tax for those sales.
 
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I've been reading about the 3 out if five years of profit distinction mentioned.

What does this have to say do a new income source with 0 years of track record?

What it seems to me is that they may keep a closer eye on hobby income over a period of several years.
 
I keep a simple spreadsheet where I list all my expenses (kits, blanks, glues, sandpaper, etc) and a listing of my shows with the sales. I also list any individual sales made.
It serves 2 purposes for me: 1) reminds me how much I'm spending each year on my hobby versus the return in sales. It can get to be quite an expensive hobby, right? :rolleyes: 2) I have a record I can show the IRS in case it is ever questioned. I pay my sales taxes to the state twice a year as required here. My financial advisor also suggested I set up an LLC in case my hobby crosses over to a profitable business. I set one up through LegalZoom.com. Having an LLC is not that expensive plus it's extra protection.
 
Dan- The bookkeeping is annoying (I personally hate it), but setting up as a business lets you take advantage of a lot of write-offs. And I don't mean "take advantage" like loopholes, just more in the sense of this is how the tax code is intended to work. Like said above, a Schedule C lets you file, and this can be done by you using any decent income tax software like Turbo Tax. Depending on the bookkeeping software you use, you may also be able to print out end of year reports giving you all the info you need to plug into the tax software.

I'm not familiar with the hobby-side of this, though.
 
software in case you do want to track

I have sold none of my work and very new but

With my main business I use quickbooks online, not cheap and not something for a hobby

For a side business I use Wave Accounting, waveapps.com for tracking, it's free, online and pretty easy to use in case you want to go that route
 
babyblues said:
The distinction between hobby and business in the eyes of the IRS is determined by whether or not you make a profit in 3 out of the last 5 years. Those numbers may have changed in the last 10 years or so, but the principal is still the same. If you did make a profit in 3 of the last 5 years, it's a business, if not, it's a hobby. That distinction is significant because the IRS will allow you to offset business losses against other ordinary income, but will not allow you to offset hobby losses against other ordinary income. That means that you can't make uses of losses from a hobby to reduce your income from other sources. However, they're more than willing to accept payment of taxes on any income you earn from a hobby. Reporting either business or hobby income on your federal tax return is the same, you would use a schedule C.

Sales tax is a totally different animal. Each state has it's own set of rules and regulations pertaining to remitting sales tax to that state. You could most likely just go to your state's website and find all the information you need there. I'm in Maine, and unless you collect sales tax above a certain threshold, you aren't required to obtain a sales tax id number from the state and remit quarterly or monthly or whatever. I can just report sales tax on my state income tax return. I usually don't have to deal with that because I sell most of my pens through a watch shop and they collect the sales tax from the customers. Since I'm selling to someone who is ultimately going to resell to customers, I'm not required to report sales tax for those sales.
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That is almost but not entirely true. It can still be a business if it does not make a profit in 3 of the last 5 years. There are other criteria that can be used to determine if it is a business.
 
A key point here is that while the FEDERAL rules apply across the entire country, and are fairly simple to understand, there also rules that are enforced by the states and possibly even local jurisdictions.

Here in New York, one must have a vendors license, and also be prepared for surprise inspections by state tax authorities who routinely visit craft fairs to confirm that sales taxes are being collected.
 
In order for it to be a "business" you must be operating with the intent of making a profit -- the 3 out of 5 years showing a profit is presumtive evidence that you intend to make a profit.

If you set it up properly and do the accounting and record keeping properly it can be a business even if you don't show a profit.

1. Keep the business funds separate from personal funds. Maintain a separate account for the business and deposit all business income in that account and make all business payments from that account.
A) If you add money to the business record it as additional capital or as a loan to the business.
B) If you take money out of the business record it as return of capital, payment on a loan or dividend.

2. Write a business plan, that shows that you intend to make a profit. An Organization known as SCORE will help you with that for little or no cost to you.

3. Maintain your business inventory separate from your personal property.

4. Set up an accounting system - I persoanlly use accounts that match line items on the Schedule C tax form.

5. Keep very good written records if you use your vehicle in the business, claim any business meals or lodging and don't press your luck on the amount of the expenses claimed - if it allows 50% don't overclaim.

6. Save all business receipts.

7. Do not claim partial use of your residence as a business "office" besides being difficult to qualify for this can cause more problems than it's worth when/if you ever sell your home.

There are other things but that's enough to think about.

There are many disadvantages to being a hobby business. Having a few casual sales of items you make for your hobby does not mean you have to do a lot of reporting. Coin collectors, Stamp Collectors, baseball card collectors all do a certain amount of trading, buying and selling that they do not report to the IRS because, in general, they don't make a profit The IRS does like to get a lot of data about everything but is willing to live without it if it doesn't change your tax liability. A lot of penmakers can operate the same way, if over all you are spending more on your hobby than you are collecting from it - the IRS won't be likely bother you if you don't report it at all.

Sales Tax is a different story altogether....
 
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Smitty37 said:
There are many disadvantages to being a hobby business. Having a few casual sales of items you make for your hobby does not mean you have to do a lot of reporting. Coin collectors, Stamp Collectors, baseball card collectors all do a certain amount of trading, buying and selling that they do not report to the IRS because, in general, they don't make a profit The IRS does like to get a lot of data about everything but is willing to live without it if it doesn't change your tax liability. A lot of penmakers can operate the same way, if over all you are spending more on your hobby than you are collecting from it - they probably won't bother you if you don't report it at all.

Sales Tax is a different story altogether....
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Correct, they probably won't bother you because they probably won't find out about it. But if they do find out about it and it is "just" a hobby, then you would have to add all of your sales to your taxable income and your expenses would go to a seldom used place on your Schedule A (itemized deductions).

Keep in mind if the IRS would find your little hobby income that wasn't reported on your tax return they may look much harder and deeper for anything else. I would prefer to not give them a reason to dig.
 
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Thanks everybody for the input. Hopefully this helps others. Someone should do a library article as this is not talked about often enough if say with all the new pen makers constantly joining.

As of now (could quickly change) my plan for right now is to get my sales tax license in PA, do one or two small craft shows and sell to friends and some online.

I will charge sales tax on all in state purchases and remit and report income for this year (2013) as hobby income with the understanding that I will lose out on the deductions possible with a real business.

At the end of the year I'll re-assess and decide if I want to have a real business and if so take the appropriate steps very early in 2014 to have the entire year well documented and consistent.

Does that sound reasonable?

The motivation is an interesting question. Really my motivation is to make turning in general and pen making fully self sustaining hobby. I want it to be able to pay for my tools (not big machine tools, like turning tools) and all supplies.

I don't desire at this time to have an income stream into other areas. What I want really is for it to not impact out personal checking situation either way - not gain any income not cost anything. Maybe an unrealistic goal but what is like to do.

That said, if it I'd bring in more money that that, I wouldn't complain and would be okay with declaring business stuff, but I'm bit setting out to have a business plan by which I make money for its own sake.
 
lyonsacc said:
Smitty37 said:
There are many disadvantages to being a hobby business. Having a few casual sales of items you make for your hobby does not mean you have to do a lot of reporting. Coin collectors, Stamp Collectors, baseball card collectors all do a certain amount of trading, buying and selling that they do not report to the IRS because, in general, they don't make a profit The IRS does like to get a lot of data about everything but is willing to live without it if it doesn't change your tax liability. A lot of penmakers can operate the same way, if over all you are spending more on your hobby than you are collecting from it - they probably won't bother you if you don't report it at all.

Sales Tax is a different story altogether....
Click to expand...

Correct, they probably won't bother you because they probably won't find out about it. But if they do find out about it and it is "just" a hobby, then you would have to add all of your sales to your taxable income and your expenses would go to a seldom used place on your Schedule A (itemized deductions).

Keep in mind if the IRS would find your little hobby income that wasn't reported on your tax return they may look much harder and deeper for anything else. I would prefer to not give them a reason to dig.
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Actually it is highly unlikey that they would - they'd send you a letter saying you had $$$ unreported income and that you owed $$$ additional tax. Said letter has a place where you can dispute that claim.

I have gotten a number of such letters some of which I disputed and others where they were right. Those I disputed I always won because they were wrong. When you dispute their claim you need only to provide information regarding that claim and nothing else - they don't get a free fishing trip into the rest of your return.

Unless there is a considerable amount of money involved or they suspect deliberate fraud - they will not be likely to pursue it any farther whether or not you dispute. The IRS does not like to conduct audits where the audit is likely to cost more than it collects.
 
Dan Masshardt said:
As of now (could quickly change) my plan for right now is to get my sales tax license in PA, do one or two small craft shows and sell to friends and some online.

I will charge sales tax on all in state purchases and remit and report income for this year (2013) as hobby income with the understanding that I will lose out on the deductions possible with a real business.

At the end of the year I'll re-assess and decide if I want to have a real business and if so take the appropriate steps very early in 2014 to have the entire year well documented and consistent.

Does that sound reasonable?
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That's certainly a reasonable approach, but you might want to compare that vs filling out a Schedule C to see which way would work out best, particularly if that's your long range goal anyway.

I have 3 sideline businesses for which I use Sch C or F and they are quite simple to fill out if the business is simple. Pens are not one of them though - I am deliberately keeping this strictly as a hobby so I don't have to worry about the bookkeeping & sales tax issues. No sales = no reporting & no tax hassles.
 
edohmann said:
Dan Masshardt said:
As of now (could quickly change) my plan for right now is to get my sales tax license in PA, do one or two small craft shows and sell to friends and some online.

I will charge sales tax on all in state purchases and remit and report income for this year (2013) as hobby income with the understanding that I will lose out on the deductions possible with a real business.

At the end of the year I'll re-assess and decide if I want to have a real business and if so take the appropriate steps very early in 2014 to have the entire year well documented and consistent.

Does that sound reasonable?
Click to expand...

That's certainly a reasonable approach, but you might want to compare that vs filling out a Schedule C to see which way would work out best, particularly if that's your long range goal anyway.

I have 3 sideline businesses for which I use Sch C or F and they are quite simple to fill out if the business is simple. Pens are not one of them though - I am deliberately keeping this strictly as a hobby so I don't have to worry about the bookkeeping & sales tax issues. No sales = no reporting & no tax hassles.
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You can still deduct some expenses against the hobby business income. i.e. the cost of tables etc. at craft shows.
 
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