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

[ItsAllNew2Me!]

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.

[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.

[bcr229]

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.

[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.

[ItsAllNew2Me!]

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 .

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?

[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.

[ItsAllNew2Me!]

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?

[Marrissa]

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.

[ItsAllNew2Me!]

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

[Coluber42]

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.