Tax time again (just a general question)

[sorcerertd]

First of all, I realize that this is not an accounting forum and I am not looking for any help with filing taxes. I'd just like a general consensus for those that wish to participate. I hope this doesn't break any rules.

For the purpose of my question, I will make this basic legal statement. Any income can be reported as "other" on the primary tax form (hobby) or filed as self-employed income using a schedule C (business). The IRS has no set dollar amount at which it is no longer considered a hobby as long as your income is used primarily to support your hobby.

Let's face it, most of us are not going to pay the bills making pens. It's a hobby and a fairly expensive one. I do, however, conduct business under a registered business name. Selling on Etsy (or whatever platform) there is a clear and traceable record of any income. Technically, I did make more money than I spent last year; enough to have to pay into social security and medicare (the threshold is only $400). Truthfully, the only reason that hasn't all been spent is because it isn't enough for a nicer lathe yet. I am going to file this as business income this year and eat the 15.3% loss to the IRS. Going forward, I may change that strategy. Without advice or particulars, what you you do?

 

[peter1958]

First of all, I realize that this is not an accounting forum and I am not looking for any help with filing taxes. I'd just like a general consensus for those that wish to participate. I hope this doesn't break any rules.

For the purpose of my question, I will make this basic legal statement. Any income can be reported as "other" on the primary tax form (hobby) or filed as self-employed income using a schedule C (business). The IRS has no set dollar amount at which it is no longer considered a hobby as long as your income is used primarily to support your hobby.

Let's face it, most of us are not going to pay the bills making pens. It's a hobby and a fairly expensive one. I do, however, conduct business under a registered business name. Selling on Etsy (or whatever platform) there is a clear and traceable record of any income. Technically, I did make more money than I spent last year; enough to have to pay into social security and medicare (the threshold is only $400). Truthfully, the only reason that hasn't all been spent is because it isn't enough for a nicer lathe yet. I am going to file this as business income this year and eat the 15.3% loss to the IRS. Going forward, I may change that strategy. Without advice or particulars, what you you do?

First of all, i live in Europe, Netherlands, so all will be different.
If you have to pay taxes, don't forget all costs that are involved making the products you sell, Maintenance of tools, electrical power cost, heating of the shop and so on, be inventive. Here all costs are deductable, don't know how it works for you.
Also depreciation expense on the tools and lathe must not be forgotten.
Maybe this helps.

 

[wolf creek knives]

Every year, about this time, I give my accountant all my business info i.e. beginning inventory, closing inventory, business vehicle miles, sales, expenses, major tool purchases, travel costs when I visit customers, anything that she needs she gets. She then works her magic and gets all our stuff together and forwards all the paperwork for us to file. I hate accounting but understand the need for it. So that's why she does all our tax stuff. My business is not considered a "Hobby" by the IRS, it's considered a true business so I can write a lot of stuff off unlike a "Hobby" business. Good luck!

 

[rixstix]

Ditto for us. We give the CPA a copy of our Quickbooks Company file. She does her magic, sends us the electronic forms to sign and sends the QB copy back after she has made all the additions (and corrections to my mistakes). Due date for our business taxes was 3/15 (today). Then follows up with a bill.

Every year, about this time, I give my accountant all my business info i.e. beginning inventory, closing inventory, business vehicle miles, sales, expenses, major tool purchases, travel costs when I visit customers, anything that she needs she gets. She then works her magic and gets all our stuff together and forwards all the paperwork for us to file. I hate accounting but understand the need for it. So that's why she does all our tax stuff. My business is not considered a "Hobby" by the IRS, it's considered a true business so I can write a lot of stuff off unlike a "Hobby" business. Good luck!

 

[JBidinger]

This would imply making a profit, right?

 

[wolf creek knives]

This would imply making a profit, right?

In my case, yes. I'm profitable, and have been for 6 years now. My accountant works to get my "profit" down so I don't get hit with too much tax. This year I'll be getting a bigger shop, new table saw and dust collection system. All major tools that she writes off over a number of years. The day the IRS says my business is no longer a business and is classified as a "Hobby" is the last day the govt will ever get a dime from my business. Maybe not a bad thing, I'm just trying to be an honest business and citizen.

 

[TonyL]

I am a CPA, here are the rules (I don't make them, neither does the IRS, Congress makes the rules when they are not fighting with each other).
All income is taxable unless specifically excluded by law/statute. The question is if one can deduct the expenses associated with the production of the income. The name anyone gives this can be anything: call it a side job, hobby, money that fell from the sky...it doesn't matter. By definition all entities (yes even non profits...a whole other story, are supposed to be in business for perpetuity and to make a profit. NFP's just don't distribute their profits. If you think I am wrong...that's fine). Setting up a legal entity (corp, LLC etc) doesn't provide one with any protection (but may protect your personal assets). Whether pens are sold from a kid's lemonade stand or from 5 floors in the Empire State Building, the IRS doesn't care.

So can one deduct the expenses? The IRS will understand if losses are sustained for a year or two, especially in the beginning, but if losses are continuously sustained, the IRS can and very often does recharacterize the loss into a hobby loss and by definition hobby losses are not deductible.

About anyone anyone trying to do the right thing (this law is often ignored) when buying goods where sales tax is not collected. The law is that you must pay that tax to the delivered state as use tax. A state sales tax audit is more rare, by like having a triple root canal without anesthesia.
There is also the issue of collecting tax for sales (another story). Not judging....just stating the law.

For years Clark Howard was "selling" the no sales tax deal when buying online. I wrote to his show and I didn't hear him make those claims anymore. I am not saying that I had anything to do with it. Maybe, he learned this on his own (BTW, I like much of his advice..but no one knows everything, and I know the least.).

It looks like Tom's accountant is doing the right thing. The are lots of rules about equipment and depreciation...that can be another rats nest.
Things like how much is used for personal use, when the equipment is placed in service, etc. can all make it a PITN.

Take a look at this form before anyone starts sharing what they do with their taxes. The IRS pays handsomely for stoolies.

https://www.irs.gov/pub/irs-pdf/f3949a.pdf

Be well, and peace and serenity to all!

And remember, I am not accusing or judging any body, any practice, any thought, any thought yet to be conceived .

 

[wolf creek knives]

I am a CPA, here are the rules (I don't make them, neither does the IRS, Congress makes the rules when they are not fighting with each other).
All income is taxable unless specifically excluded by law/statute. The question is if one can deduct the expenses associated with the production of the income. The name anyone gives this can be anything: call it a side job, hobby, money that fell from the sky...it doesn't matter. By definition all entities (yes even non profits...a whole other story, are supposed to be in business for perpetuity and to make a profit. NFP's just don't distribute their profits. If you think I am wrong...that's fine). Setting up a legal entity (corp, LLC etc) doesn't provide one with any protection (but may protect your personal assets). Whether pens are sold from a kid's lemonade stand or from 5 floors in the Empire State Building, the IRS doesn't care.

So can one deduct the expenses? The IRS will understand if losses are sustained for a year or two, especially in the beginning, but if losses are continuously sustained, the IRS can and very often does recharacterize the loss into a hobby loss and by definition hobby losses are not deductible.

About anyone anyone trying to do the right thing (this law is often ignored) when buying goods where sales tax is not collected. The law is that you must pay that tax to the delivered state as use tax. A state sales tax audit is more rare, by like having a triple root canal without anesthesia.
There is also the issue of collecting tax for sales (another story). Not judging....just stating the law.

For years Clark Howard was "selling" the no sales tax deal when buying online. I wrote to his show and I didn't hear him make those claims anymore. I am not saying that I had anything to do with it. Maybe, he learned this on his own (BTW, I like much of his advice..but no one knows everything, and I know the least.).

It looks like Tom's accountant is doing the right thing. The are lots of rules about equipment and depreciation...that can be another rats nest.
Things like how much is used for personal use, when the equipment is placed in service, etc. can all make it a PITN.

Take a look at this form before anyone starts sharing what they do with their taxes. The IRS pays handsomely for stoolies.

https://www.irs.gov/pub/irs-pdf/f3949a.pdf

Be well, and peace and serenity to all!

And remember, I am not accusing or judging any body, any practice, any thought, any thought yet to be conceived .

Nicely stated and put Tony!

 

[rixstix]

Nice comments Tony,

I wish QuickBooks would figure out how to easily handle "USE" tax. As-in click a few buttons similarly to setting up Sales Tax.

Tracking and reporting USE tax has always been a PIA, for us at least. Knowing someone who had the pleasure of embrasing a Use Tax audit sure changed our outlook of the lesser understood State & Local taxing category.

 

[penicillin]

Do you want to make $100,000 from pen turning? First, start with $200,000.

Here are my two serious comments:

1. All of the pens I have made were for personal/family use or presented as gifts, so the question is moot for me.

2. I do not understand why anyone would admit to illegal (or immoral) behavior by posting such information in a public forum on the internet. Yes, people do it all the time.

-> Assume that anything you post is recorded forever, and your anonymity is quickly lost if anyone has a need to know. Even small things may bite you in the future. A divorce attorney or prosecutor may use a stupid post in this thread to show "a pattern of money hiding or tax avoidance behavior" or simply "making false statements", for example.

I said "public forum", but honestly, private communications do not stay private either. What is secure today may not be secure tomorrow, and see my comment above about how everything is recorded forever. Here are two recent examples in the news. I grabbed the first ones I found, not necessarily the "best":
https://www.techradar.com/news/poli...ter-infiltrating-their-encrypted-phone-system
https://blog.malwarebytes.com/repor...-sky-ecc-encryption-for-organized-crime-bust/

 

[TonyL]

Can You Track USE TAX in QuickBooks? - Heintzelman Accounting Services

Businesses are now becoming more aware of the requirements to remit use tax on goods brought into their state when sales tax is not charged. However, QuickBooks users have found it challenging to find an effective method of tracking the amount of use tax to report and pay. The good news is...

hasgr.com

 

[sorcerertd]

I am a CPA, here are the rules (I don't make them, neither does the IRS, Congress makes the rules when they are not fighting with each other).
All income is taxable unless specifically excluded by law/statute. The question is if one can deduct the expenses associated with the production of the income. The name anyone gives this can be anything: call it a side job, hobby, money that fell from the sky...it doesn't matter. By definition all entities (yes even non profits...a whole other story, are supposed to be in business for perpetuity and to make a profit. NFP's just don't distribute their profits. If you think I am wrong...that's fine). Setting up a legal entity (corp, LLC etc) doesn't provide one with any protection (but may protect your personal assets). Whether pens are sold from a kid's lemonade stand or from 5 floors in the Empire State Building, the IRS doesn't care.

So can one deduct the expenses? The IRS will understand if losses are sustained for a year or two, especially in the beginning, but if losses are continuously sustained, the IRS can and very often does recharacterize the loss into a hobby loss and by definition hobby losses are not deductible.

About anyone anyone trying to do the right thing (this law is often ignored) when buying goods where sales tax is not collected. The law is that you must pay that tax to the delivered state as use tax. A state sales tax audit is more rare, by like having a triple root canal without anesthesia.
There is also the issue of collecting tax for sales (another story). Not judging....just stating the law.

For years Clark Howard was "selling" the no sales tax deal when buying online. I wrote to his show and I didn't hear him make those claims anymore. I am not saying that I had anything to do with it. Maybe, he learned this on his own (BTW, I like much of his advice..but no one knows everything, and I know the least.).

It looks like Tom's accountant is doing the right thing. The are lots of rules about equipment and depreciation...that can be another rats nest.
Things like how much is used for personal use, when the equipment is placed in service, etc. can all make it a PITN.

Take a look at this form before anyone starts sharing what they do with their taxes. The IRS pays handsomely for stoolies.

https://www.irs.gov/pub/irs-pdf/f3949a.pdf

Be well, and peace and serenity to all!

And remember, I am not accusing or judging any body, any practice, any thought, any thought yet to be conceived .

Thanks for the professional insight, Tony. I am not trying to get over on the IRS, nor am I encouraging anyone here to disclose anything that might incriminate them. In fact, I wasn't really encouraging discussion on it, though some is certainly welcome. I just thought I'd see how others did it that cared to cast an anonymous vote. Maybe I should have left that last option out, but there are people who don't actually sell any of their pens, so we'll stick with that interpretation.

I registered as a legit business to begin with to keep things all legal and proper. My income is absolutely being reported. I'm just not sure it's worth the extra work to file it as a business when there is a spot for me to put "other". Filing as a business indicates an intention of making money. I only sell pens so I can buy more tools and pen stuff. I don't want it to become actual work.

I did see this old thread (2013) suggesting that it is more advantageous to file as a business, though. There is some interesting data there, and I'm sure some of it has changed, but probably not that much.

U.S. Tax reporting for Pen Hobbies

Everyone here at IAP has been a great help with this wonderful pen turning addiction :biggrin: thing going on in my life. So, I thought I might try to share a little of my knowledge from the work I do that helps pay for pen kits and blanks. My wife :beauty:and I :clown:are both CPAs and have...

www.penturners.org

 

[mmayo]

I too file every year as carefully as possible. We ring up every sale: cash, credit or check at shows on square. All sales from a refill to an expensive pen get recorded. Other folks only do credit and forget to register any cash sales. We had an amazing increase in sales over the last five years so losses happened as stuff got bought to make more stuff. Thank goodness this year with covid19 we showed a profit.
So much easier to report everything and get back in the shop.

 

[TonyL]

Thanks for the professional insight, Tony. I am not trying to get over on the IRS, nor am I encouraging anyone here to disclose anything that might incriminate them. In fact, I wasn't really encouraging discussion on it, though some is certainly welcome. I just thought I'd see how others did it that cared to cast an anonymous vote. Maybe I should have left that last option out, but there are people who don't actually sell any of their pens, so we'll stick with that interpretation.

I registered as a legit business to begin with to keep things all legal and proper. My income is absolutely being reported. I'm just not sure it's worth the extra work to file it as a business when there is a spot for me to put "other". Filing as a business indicates an intention of making money. I only sell pens so I can buy more tools and pen stuff. I don't want it to become actual work.

I did see this old thread (2013) suggesting that it is more advantageous to file as a business, though. There is some interesting data there, and I'm sure some of it has changed, but probably not that much.

U.S. Tax reporting for Pen Hobbies

Everyone here at IAP has been a great help with this wonderful pen turning addiction :biggrin: thing going on in my life. So, I thought I might try to share a little of my knowledge from the work I do that helps pay for pen kits and blanks. My wife :beauty:and I :clown:are both CPAs and have...

www.penturners.org

Hi Todd: I was not intimating that you are doing anything wrong....hopefully all know me not to judge or criticize others. If folks do not know that, then I need to improve my communication skills. I am will cheerfully work on them.

There are very, very few tax advantages to filing as a business especially to a small business (but you can look that up yourself). Creating a business (corp, LLC, etc.) is performed to protect your personal assets (any only if folks are very careful about how they handle funds, fixed assets, etc.) and protection is limited.

I have a Corp that I use when I do consulting work. I do this so that if someone pursues legal action because they believe that they suffered a loss due to my advice, my personal assets are protected. My business assets are not (cash, fixed assets, receivables, etc. .

If you want more information from me, just send me your number. Too much to explain.

BTW, even if you do not form a legal entity (just use 1040, Schedule C, the IRS looks at your losses and income the same way. You would be filing as a sole proprietor.

I pay 50 a year to register my Corp each year and 100 for the tax software. Other than that, I do not have any other ongoing annual costs.

Maybe annual registration and such is different is other states.

Another side note. My homeowners policy "knows" that I have 5 lathes, other power tools and that occasionally customers will visit my home and workshop. In my case, it didn't raise my rate.

 

[Pen_man_ship]

Only nine votes and I'm one....this says to me 99.9 % of the members here consider pen making to be a hobby. And there is nothing wrong with that. Personally, I've spent way too much money to just give away a few pens. I'm all in for pursuing a profit.