Hobby Vs. Business (Where's the Line?)

Hi all,

I have been doing a lot of research lately and am running into a lot of walls of nothingness. I am trying to answer some questions before I get into breeding my animals:

1. When does a hobby become a business?

------> Is this determined by number of animals sold, website, LLC, name, amount of money made from selling animals, or just declaring yourself a business or hobbyist?

2. I understand that this may be a state by state thing but, Do you need to claim\file taxes on animals sold? If so, when do you do this at a certain dollar amount, quantity sold, or only if you declare yourself a business?

This is just a starting point for me. I did look for quite a while online and read so many state statutes and things but nothing is really clear. In my state it really only talks about dogs and cats and some native reptiles and amphibians but nothing really regarding bps. They also don't clearly state anything about taxation or business regulations on bps. Any help is greatly appreciated. Also I live in Wisconsin (considered one of the leanest states on exotic animals) so any input on my states standpoint would be greatly appreciated.

The line is so fuzzy there are in fact tax laws for filing as a "hobby business". I forget all the details, but essentially with a hobby business you can't claim more in deductions than you made in income from the business that year, even if you had more expense than income.

https://www.irs.gov/uac/Business-or-...for-Deductions

This is pretty much it in a nutshell; the IRS doesn't want you declaring a risky unlikely-to-ever-show-a-profit hobby (like snake breeding) as a business so that expenses can offset earned income and lower your income tax bill for years and years.

Most people are much better off running as a hobby, not worrying about maintaining separate business accounts and/or a business structure like an LLC or Corp, collecting and remitting sales taxes, checking local zoning ordinances and HOA regulations to see if a business license can even be issued for your home address, etc.

The IRS makes the distinction between hobby and business based on how much profit it makes. I think the cap is around $1000 or $2000 after expenses. It can bring in less than that and still be a business, but it can't bring in more than that and still be a hobby. At least, for taxation purposes. In terms of your goals and your personal life, you can call it whatever you want.

But yes, you are technically supposed to report income on anything you sell, period. In practice, most people don't do that if they're unloading old furniture on Craigslist or old records on eBay or whatever, and if you produced a clutch or two and sold a handful of babies under the radar probably no one would care (although if you got audited they might). But if you're going to be selling anything on any kind of regular basis you need to report it.

There's a variety of tax entities your business or hobby can be, and various reasons for each, such as sole proprietorship, partnership such as an LLC (even if the partnership is just you), S-corp, C-corp, etc. You should do your research or speak to an accountant if you're going into business for the long haul, but that said you can file it under self-employment income on Schedule C and it is pretty straightforward. TurboTax is your friend and will walk you through what you need to know, provided you have records of your sales and expenses. I don't know about how the rules work for breeding animals, but for manufacturing for example, there is a difference between how you handle inputs such as raw materials or pre-made components, and how you handle expenses such as tools and equipment. For animals, there's probably a distinction between feed and caging for example, but I don't know the specifics.

Different cities, counties, and states have different rules for the structure of some of these business entities, and for what kinds of license you need for various kinds of sales, and rules about things like sales tax. For example, you may need a business license to sell one type of product but not another. If you are breeding snakes, you might also want to sell some basic supplies as a retailer, in which case you'd want to find out about the rules for retail sales of pet products in addition to sales of live animals. It's maybe a minor hassle to find all that stuff out for where you live, but once you've done it you know.

Basically, as long as you have kept good records, TurboTax will tell you what to do in order to report your income from either hobbies or self-employment. As far as state and local ordinances go with regard to ball pythons specifically, you might have to make some phone calls.


Editing to add: I'm not an accountant; the above is only my recollection; I usually have to go look up all kinds of stuff all over again every time I do my taxes, and I haven't done them yet this year, so take that as you will. But I have filed lots of Schedule C's. ;)

Quote:

---

Originally Posted by Lizardlicks

The line is so fuzzy there are in fact tax laws for filing as a "hobby business". I forget all the details, but essentially with a hobby business you can't claim more in deductions than you made in income from the business that year, even if you had more expense than income.

---

Thanks for your time. My question was more towards when do you HAVE to file. If I wouldn't have to then I would not worry about it. If I can just say it is a hobby and have no financial obligations to local or federal taxation entities then so be it. IMO I don't care to claim loss so I was wondering if there was an obligation to claim gain. Thanks again for the response. Please add more input if you have any. This topic intrigues me :gj:.

Quote:

---

Originally Posted by bcr229

https://www.irs.gov/uac/Business-or-...for-Deductions

---

Thanks for the link but this was also some vague information I did run across. Maybe I misread it somewhere but the only implication is that if I claim (it does not necessary say I have to claim) and I say I am a hobby then I cannot claim loss. If I say I am a business I have to prove profit. Also if I claim a business which you receive a tax ID I would have to claim taxes whether a loss or profit. So am I correct in assuming that I can be a hobbyist and not claim anything? Also do you know of any guideline to say that past this amount made or amount sold you have to do taxes? Thanks for your time :) and please continue to add any ideas or information.

Sorry I missed your addition. So basically I can just keep calling it a hobby and not worry about filing. Is there a limit to my profit V.S. loss before it gets risky to not claim?

THe short version is that if you get income from something, you are supposed to declare it as *something*. If you make necklaces out of soda can tabs and sell them at the flea market and make $15, you are technically supposed to tell the IRS about it.

It's pretty unlikely that anyone will come after you for not telling the IRS about chump change, particularly if you do it in cash and don't have a paper trail anyway. But if you have deposits showing up in your bank account that are bigger than your buddy reimbursing you for his share of dinner, it's a good idea to declare them. It doesn't mean you'll actually owe any more in taxes necessarily - if you brought in $1000 by selling babies but spent $1000 on new snakes, it's a wash. But you should still declare it.

Quote:

---

Originally Posted by Coluber42

The IRS makes the distinction between hobby and business based on how much profit it makes. I think the cap is around $1000 or $2000 after expenses. It can bring in less than that and still be a business, but it can't bring in more than that and still be a hobby. At least, for taxation purposes. In terms of your goals and your personal life, you can call it whatever you want.

But yes, you are technically supposed to report income on anything you sell, period. In practice, most people don't do that if they're unloading old furniture on Craigslist or old records on eBay or whatever, and if you produced a clutch or two and sold a handful of babies under the radar probably no one would care (although if you got audited they might). But if you're going to be selling anything on any kind of regular basis you need to report it.

There's a variety of tax entities your business or hobby can be, and various reasons for each, such as sole proprietorship, partnership such as an LLC (even if the partnership is just you), S-corp, C-corp, etc. You should do your research or speak to an accountant if you're going into business for the long haul, but that said you can file it under self-employment income on Schedule C and it is pretty straightforward. TurboTax is your friend and will walk you through what you need to know, provided you have records of your sales and expenses. I don't know about how the rules work for breeding animals, but for manufacturing for example, there is a difference between how you handle inputs such as raw materials or pre-made components, and how you handle expenses such as tools and equipment. For animals, there's probably a distinction between feed and caging for example, but I don't know the specifics.

Different cities, counties, and states have different rules for the structure of some of these business entities, and for what kinds of license you need for various kinds of sales, and rules about things like sales tax. For example, you may need a business license to sell one type of product but not another. If you are breeding snakes, you might also want to sell some basic supplies as a retailer, in which case you'd want to find out about the rules for retail sales of pet products in addition to sales of live animals. It's maybe a minor hassle to find all that stuff out for where you live, but once you've done it you know.

Basically, as long as you have kept good records, TurboTax will tell you what to do in order to report your income from either hobbies or self-employment. As far as state and local ordinances go with regard to ball pythons specifically, you might have to make some phone calls.


Editing to add: I'm not an accountant; the above is only my recollection; I usually have to go look up all kinds of stuff all over again every time I do my taxes, and I haven't done them yet this year, so take that as you will. But I have filed lots of Schedule C's. ;)

---

Thank you very much for this!

Ok I have a dream senario for you. Say I were to get a perfect 8 eggs out of 10 females to come out perfect and I now have 80 babies. I would like to sell 70 of these and say I lucked out and made $14k. According to your info the IRS would deem that a business and therefore expect taxes out of those sales. Now would I then declare a business license or would the Schedule C come in? Also the next year I plan to continue breeding. Would it be best to then create a business or just keep doing Schedule C?

I basically don't want to actually declare a business but want to know officially when I have to and when I would need to claim taxes. Also am I right to assume that creating a website listing my for sale animals would pretty much imply that I am a business to the IRS and therefore I would be better off claiming a business right away?

Quote:

---

Originally Posted by Coluber42

The IRS makes the distinction between hobby and business based on how much profit it makes. I think the cap is around $1000 or $2000 after expenses. It can bring in less than that and still be a business, but it can't bring in more than that and still be a hobby.

---

Is that for the year? Like yearly expensive vs yearly income? Because if not I have like 10k in snakes and several more k in enclosures and it's going to be a while before I see profit.

Quote:

---

Originally Posted by Coluber42

THe short version is that if you get income from something, you are supposed to declare it as *something*. If you make necklaces out of soda can tabs and sell them at the flea market and make $15, you are technically supposed to tell the IRS about it.

It's pretty unlikely that anyone will come after you for not telling the IRS about chump change, particularly if you do it in cash and don't have a paper trail anyway. But if you have deposits showing up in your bank account that are bigger than your buddy reimbursing you for his share of dinner, it's a good idea to declare them. It doesn't mean you'll actually owe any more in taxes necessarily - if you brought in $1000 by selling babies but spent $1000 on new snakes, it's a wash. But you should still declare it.

---

I guess there is the under the table approach such as that :). My only issue is that whatever I read anything about declaring taxes on a hobby is that the information is always talking from the standpoint of loss declaration. For instance i got this from turbotax:

https://turbotax.intuit.com/tax-tool.../INF22852.html

It basically says that it is not a business if it has not shown profit for three consecutive years so it is deemed a hobby and therefore you can't declare loss but then there is an assumption that you must claim gain there as well even though to them it is not a business...Kinda of vague to me on that portion. So what if I don't care to claim loss at all that still leaves me obligated to claim gain, and am I right to assume that it is not up to me to call it a hobby or a business from a tax standpoint, it is up to the IRS? Sorry don't want to muddle this too much :)

It may be before expenses... can't remember! Ask me again, say, mid-April! ;)

You don't really have to do anything extra special to file a schedule C. You just fill out the form, give it a name (which is really just a reference name - it isn't a public name or DBA or anything, so it doesn't have to be cute, just descriptive. "Teaching saxophone" or "painting" or "VCR repair") and fill in the boxes for how much money you brought in and how much you spent on it. It's not like forming a corporation or partnership or getting a business license or anything like that.

It's also completely independent of licensing or zoning requirements for the specific type of business in your area. The IRS does not care if I am manufacturing doodads in my house when my city requires an industrial-zoned site for doodad manufacture. They just care about the income.

For various reasons, it might be advantageous to have a corporation or partnership. For example, an LLC will protect your personal assets if someone decides to sue your business. And those structures become important if you have a business partner or co-owner, sometimes if you have employees, possibly to take advantage of various grants or tax incentives, and sometimes if your industry involves purchasing from wholesalers who want to only sell to legit businesses or whatever. But you don't *have* to do that, and if you're a one-person business with a low risk of being sued and there aren't any of those other incentives to take advantage of, there's no reason you ever have to form a corporation or partnership.

Thank you Coluber. When you fill out the Schedule C do you have to include receipts and what not for sales and expenses. Also again how would owning a website with your animals for sale listed affect your hobby vs business status?

Just answer the questions TurboTax asks you and you'll be fine. ;)

You should save your receipts so you have a record and in the unlikely event that you get audited and someone asks to see them, but you don't include them with your tax return or anything.

Having a website or a cute DBA name or stickers or certificates or advertisements or booths at shows or shipping tape with your name on it or whatever is totally irrelevant. The costs of those things would be considered business expenses, but having them or not having them makes no difference at all to whether you're a business or not for tax purposes.

You pay taxes on net income not gross sales.

So, if you sold $14k in babies that's great, but you deduct the cost of your breeder snakes, feeders, the incubator, the snake racks, thermostats, heat tape, substrate, hides, water dishes, vet bills, web hosting fees if you have a web site, advertising fees, travel expenses to/from expos, shipping fees, shipping boxes/insulation/heat packs, etc. etc. etc.

If your expenses are more than your income and you've put business losses on your schedule C for three years running, you're at risk of the IRS going back and saying your business is really a hobby, and then you get hit with back taxes, penalties, and interest. This is why I keep my snake-breeding strictly a hobby and every December I figure out income versus expenses, and if I had a good year I go shopping. :D

Quote:

---

Originally Posted by Coluber42

Just answer the questions TurboTax asks you and you'll be fine. ;)

You should save your receipts so you have a record and in the unlikely event that you get audited and someone asks to see them, but you don't include them with your tax return or anything.

Having a website or a cute DBA name or stickers or certificates or advertisements or booths at shows or shipping tape with your name on it or whatever is totally irrelevant. The costs of those things would be considered business expenses, but having them or not having them makes no difference at all to whether you're a business or not for tax purposes.

---

Thanks. I am a computer Geek so a website not only seems smart but fun just the same :cool:.

Quote:

---

Originally Posted by bcr229

You pay taxes on net income not gross sales.

So, if you sold $14k in babies that's great, but you deduct the cost of your breeder snakes, feeders, the incubator, the snake racks, thermostats, heat tape, substrate, hides, water dishes, vet bills, web hosting fees if you have a web site, advertising fees, travel expenses to/from expos, shipping fees, shipping boxes/insulation/heat packs, etc. etc. etc.

If your expenses are more than your income and you've put business losses on your schedule C for three years running, you're at risk of the IRS going back and saying your business is really a hobby, and then you get hit with back taxes, penalties, and interest. This is why I keep my snake-breeding strictly a hobby and every December I figure out income versus expenses, and if I had a good year I go shopping. :D

---

Thank you for your break down it was very helpful. So basically you always claim Schedule C but make sure it always under a hobby and show that you break even?

I've had my own business for 20 years now and. pretty much any money you make your "suppose to" declare. that being said if you deal in cash ..easier to pocket. I save every receipt I make threw out the year and write them off. Works out pretty well made about 39k and wrote off 19k. there is a part when you file on turbo tax that ask if you made any other money, and that's where you would declare you profit/loss. pretty much have to save all paper work for 7 years ( crazy I know). but you don't have to send in anything other than your normal tax forms. if you do say make a business out of it there's lots to deduct electricity, food, cleaning, etc.. and so on. I write off portion of my internet, cell phone, office stuff.. plain in simple if you make 4-5k or more I would think about reporting it. Worry about it once the money starts coming it :)

Quote:

---

Originally Posted by ItsAllNew2Me!

Thank you for your break down it was very helpful. So basically you always claim Schedule C but make sure it always under a hobby and show that you break even?

---

No, I don't bother with a Schedule C at all because I deliberately post a loss each year. If I get audited and the IRS wants to know about any deposits from sources other than my day job to my personal bank accounts - because remember PayPal reports transactions to the IRS - I have a stack of receipts that would give me a whopper of a writeoff should there be any attempt to state that my hobby is a business and I should file an amended return.

Hobby income isn't reported on Schedule C, it's somewhere else on the main 1040 I think. Schedule C is for self-employment income, or pass-through entities like LLC's in which you're the only owner or member.

I think the thing about hobby income is that they want to make sure that you can't get out of paying your income taxes by spending money on an expensive hobby and then calling it a business loss. Think of it like this: Say Uncle Scrooge makes $500k/year at his regular job. He likes boats, and occasionally takes tourists out on his fancy boat for a couple hundred bucks here and there. So he makes $1000 by taking a group of tourists out for an evening excursion, and calls it a boat tour business. Then he buys a new boat for $450k and tells the IRS that his boat tour business lost $449k this year, making his overall taxable income $51k. Obviously he would rather pay taxes on $51k than on $501k.
But the IRS says not so fast buster, your boat tours are a hobby and you can't claim that you only made $51k this year just because you spent $450k on a yacht.

Thank you all for you time and the great information! This has made things a lot clearer for me. I'm sure I will have more questions as I get closer to breeding. Please if anyone has anymore information or feel comfortable with telling me their ideas or what they do I would greatly appreciate it. :gj:

My advice about converting a hobby into a business is, don't think you have to do it all at once if you aren't ready for it (with the exception of things like manufacturing a product that requires injection molding or something where there's really no way to do small quantities economically). You can ease into it and gradually increase your volume (and the expenses and complications that come with it) as you're ready. There is no need to bite off more than you can chew - trying to grow too fast is a big reason a lot of startups and small businesses fail. Keep it slow and steady, at a pace you can manage. Heh, just like feeding a baby snake, right? Don't try to power feed and don't feed a meal that's too big and likely to be regurgitated - let your operation grow with you.

There will come a point when you have to make a decision to give up your day job, and that's a big step. If you're lucky, you may be able to do it gradually too - I was fortunate to be able to gradually decrease my hours at my day job over a couple of years instead of having to make the leap all at once. Aside from the financial reasons, it's also hard to go from having a regular routine at a separate workplace, with coworkers you interact with, etc, to working at home by yourself all day every day even if you're basically doing things you enjoy.

I do know something about this, because that's how I started my business, and I'm happy to share my experiences and what I know... but at this point maybe that discussion is best conducted via PM or email, or at least in the Business or O-T sections?

Quote:

---

Originally Posted by bcr229

PayPal reports transactions to the IRS

---

Electronic payments are only reported if they're $20k or more or there's 200 electronic transactions or more.

In regards to income, all income made has to be reported to the IRS.

In the scenario of hobby income, you can deduct expenses UP TO the amount of your income. Meaning, you cannot have a loss. There's also limitations on different expenses but I won't get into that.

Also, you dont file a schedule C for hobby income/expenses. You'd report income as "Other income" on your 1040 return and deduct expenses on your schedule A. The problem with that is, if you don't itemize, you cannot deduct hobby expenses. And that's how the IRS gets you.




Sent from my SAMSUNG-SM-G920A using Tapatalk

Quote:

---

Originally Posted by Coluber42

My advice about converting a hobby into a business is, don't think you have to do it all at once if you aren't ready for it (with the exception of things like manufacturing a product that requires injection molding or something where there's really no way to do small quantities economically). You can ease into it and gradually increase your volume (and the expenses and complications that come with it) as you're ready. There is no need to bite off more than you can chew - trying to grow too fast is a big reason a lot of startups and small businesses fail. Keep it slow and steady, at a pace you can manage. Heh, just like feeding a baby snake, right? Don't try to power feed and don't feed a meal that's too big and likely to be regurgitated - let your operation grow with you.

There will come a point when you have to make a decision to give up your day job, and that's a big step. If you're lucky, you may be able to do it gradually too - I was fortunate to be able to gradually decrease my hours at my day job over a couple of years instead of having to make the leap all at once. Aside from the financial reasons, it's also hard to go from having a regular routine at a separate workplace, with coworkers you interact with, etc, to working at home by yourself all day every day even if you're basically doing things you enjoy.

I do know something about this, because that's how I started my business, and I'm happy to share my experiences and what I know... but at this point maybe that discussion is best conducted via PM or email, or at least in the Business or O-T sections?

---

Thanks a lot for all your information Coluber. I will definitely be taking my time with this. Just wanted and idea of where this could go :). Also quitting my day job will most likely not happen lol...would be nice though and I don't think I will miss a 9-5 and coworkers as much as some would :P.

Quote:

---

Originally Posted by Mr. Misha

Electronic payments are only reported if they're $20k or more or there's 200 electronic transactions or more.

In regards to income, all income made has to be reported to the IRS.

In the scenario of hobby income, you can deduct expenses UP TO the amount of your income. Meaning, you cannot have a loss. There's also limitations on different expenses but I won't get into that.

Also, you dont file a schedule C for hobby income/expenses. You'd report income as "Other income" on your 1040 return and deduct expenses on your schedule A. The problem with that is, if you don't itemize, you cannot deduct hobby expenses. And that's how the IRS gets you.

---

Thank you very much for this info Misha! I did not even think about looking at PayPal's policy. It actually is even better than what you posted. According to the site, they only report to the IRS if you meet both the limits of Receiving $20k for goods and services and have more than 200 transactions. These both have to be reached before PayPal gets the IRS involved. Which brings up why PayPal must be very lucrative for some sellers. Also thank you very much for the tax tips and the forms. I am saving all of this information for when I start breeding and it is much appreciated.:gj:

PayPal IRS Information:

https://www.paypal.com/webapps/mpp/irs6050w

Personally, my definition of an activity that is more than "just" a hobby is one that brings in enough money that you wouldn't really want to just give up that source of income. A hobby that brings in a little extra cash to spend on a night out or a new toy here and there is still what I think of as a hobby. More than a hobby means it's making a meaningful contribution to your household expenses, quality of life, savings account, ability to invest in important things, etc, regardless of what actual percentage it is. (What the IRS considers it is irrelevant there, too)

If your goal is to develop your breeding activities to that point, you should start by at least keeping track of what your expenses are and how much time you're spending. This isn't just because of what you need to tell the IRS - it's because if you want to get something specific out of it, you have to know what's going into it. You are probably not going to cover an entire year's worth of feeders, bedding, supplies, electricity, equipment, etc, let alone paying yourself for the time it takes to feed animals, clean cages, take photos, post classified ads, answer questions from potential buyers, etc, by producing a clutch or two here and there. But if you know what those expenses really are, then you can get some rough idea of how many babies you'd need to sell and at what prices in order break even, make a bit of extra spending money, or substantially contribute to your household income.

Supplies and inputs generally get cheaper with volume; some kinds of labor get cheaper with volume too, but some kinds really don't. Paper towels are cheaper in quantity, but no matter how many bins you have to clean, there is only so fast you'll ever get at cleaning each one.

If you aren't breaking even at first, that's fine; most new businesses require either a growth phase or a big initial investment, or both. But you need to have an idea of what it will take to get to the point of being profitable eventually. If you can't envision getting there (like, you calculate that you need x number of clutches per year, but you just don't have the space to house that many snakes or you can't realistically see yourself with enough time to take care of that many, etc) you will probably be happier keeping it as a hobby that sort of pays for itself or brings in a little fun money.

Quote:

---

Originally Posted by Coluber42

Personally, my definition of an activity that is more than "just" a hobby is one that brings in enough money that you wouldn't really want to just give up that source of income. A hobby that brings in a little extra cash to spend on a night out or a new toy here and there is still what I think of as a hobby. More than a hobby means it's making a meaningful contribution to your household expenses, quality of life, savings account, ability to invest in important things, etc, regardless of what actual percentage it is. (What the IRS considers it is irrelevant there, too)

If your goal is to develop your breeding activities to that point, you should start by at least keeping track of what your expenses are and how much time you're spending. This isn't just because of what you need to tell the IRS - it's because if you want to get something specific out of it, you have to know what's going into it. You are probably not going to cover an entire year's worth of feeders, bedding, supplies, electricity, equipment, etc, let alone paying yourself for the time it takes to feed animals, clean cages, take photos, post classified ads, answer questions from potential buyers, etc, by producing a clutch or two here and there. But if you know what those expenses really are, then you can get some rough idea of how many babies you'd need to sell and at what prices in order break even, make a bit of extra spending money, or substantially contribute to your household income.

Supplies and inputs generally get cheaper with volume; some kinds of labor get cheaper with volume too, but some kinds really don't. Paper towels are cheaper in quantity, but no matter how many bins you have to clean, there is only so fast you'll ever get at cleaning each one.

If you aren't breaking even at first, that's fine; most new businesses require either a growth phase or a big initial investment, or both. But you need to have an idea of what it will take to get to the point of being profitable eventually. If you can't envision getting there (like, you calculate that you need x number of clutches per year, but you just don't have the space to house that many snakes or you can't realistically see yourself with enough time to take care of that many, etc) you will probably be happier keeping it as a hobby that sort of pays for itself or brings in a little fun money.

---

Thank you for this again. I do plan on it being more of a hobby that pays for itself than an actual full blown business. I love working with reptiles and have quite a few and breeding my own morphs is the next step for me. On top of that mixing it with my IT profession by building a great website makes it even more exciting for me. I just wanted do the research before I got to far into it. I don't want any surprises down the road so I figured I should knock one of the most vague issues out of the way which obviously to me is taxes lol. Thanks so much for your responses. I may have to take you up on you PM\Email offer on more info :cool:.