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

[ItsAllNew2Me!]

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?

[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.

[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.

[ItsAllNew2Me!]

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 .

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.

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?

[spikell75]

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

[bcr229]

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.

[Coluber42]

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.

[ItsAllNew2Me!]

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.

[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?

[Mr. Misha]

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.




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