Tax Law Changes For Hobbiests

does one have to register as a business? how much does that cost? and are those expenses covered as well? the last i heard, no expenses are covered not fuel or anything else.


---Mike Savad
http://www.MikeSavad.com

I don't know Mike something I will ask my tax person this year. Those looking to form an LLC in Iowa must file a Certificate of Organization with the Secretary of State, which must be submitted with the required filing fee. 2. Fees. The filing fee for a Certificate of Organization is about $50. So not too bad for my state.

Mike

It depends on the state.

In NY you can be an unincorporated sole proprietor for around $40.

Don't know about NJ.

In NH they don't have that classification so I'd have to incorporate which subjects you to Federal minimum corporate taxes.

In any case you can't report a loss for more than 3 consecutive years or they stick you back in the hobbyist category. Unless of course you're a major player like Amazon.

It's been years since I had to report as a business - had a sales tax # etc - I've always added my 'winnings' and never had enough for any deductions - This WILL hurt those that are doing well - but not running it as a business but just a hobby - the government at all levels is looking into your pockets.

As a business, you can file a "Schedule C" with your Federal return. There are many areas that you can deduct, including fees, advertising, mileage and even business use of your home, just to name a few. If you do art shows like I sometimes do, you have to register with the state as a business to collect sales tax, which of course you need to pay back to the state when due...I believe the fee for my state of Wisconsin is $10 annually. One added benefit of having a state business license which I do not take advantage of is that you do not have to pay the sales tax on items that are sold back to the buyer, such as paint or wood...but for some reason (...lazy...) I just make it easier for myself and do not do the required paperwork at the store to file for tax exempt status on such purchases and pay the sales tax on them anyway. If your state doesn't have a sales tax and you do not do art shows anyway, then I am not sure what any fee for registering as a business does...but I think you can still file a Schedule C, as there is a code for "artist" in the list of professions. I am not a tax professional, but I have always done my own taxes.

Actually, I think this is a good ruling. It may level the playing field a bit for those of us who treat art as a business. (Let the flames begin.)

But, one can declare themselves a sole proprietor for business and obtain an EIN (Employer Identification Number) from the IRS. You do not need to have an employee/s to obtain this number - often called a Tax Identification Number for sole proprietors. One gets to "file" as a business by completing a Schedule C to attach to their personal income tax returns.

I actually have a small corporation (Delaware) for online sales of "items." My photography business is not a pert of that and is run as a sole proprietorship as a part of my small consulting business (High Noon Performance Marketing). I use an accounting/CPA service for all of our taxes. It actually costs me a bit more for my personal taxes, because of the Schedule C, than in does for our corporation each year.

Note: IANATL

I have been reporting "income" as an "artists" all along. Four years now. The cost to do this was zero.

It is not a business, but my profession. Same thing for these purposes. It is personal income taxes.

I have made very little from this . I have never taken any deductions. I have profits every year, however little they are. If you declare a loss because of expense deductions for two years, it pushes you into the hobby status with the IRS. Then you will owe the deduction monies back to the IRS. Ask your accountants about this. They should know this. US IRS law.

The new ruling makes little difference. You need to run in the black. That really should be easy in this business. Again skip deductions that push you into the red. At least in my case the expenses are not much. Minor in fact.

Dave
Post Modern Artist

I just file a schedule C every year. I have to because I get 1099s. Some years i do consulting work and photography is part of that. Other years it's mostly just royalties. I only do business to business sales and only services to the public, no sales. So no sales tax license needed. I won't even give you a DVD with a photoshoot. You have to let me upload somewhere or loan me a flash drive. That's so i don't have to file sales tax. I use my SS number for my schedule C. I don't need any business license here in Florida and not for the county either. I never ever write off travel for anything strictly photography. I do write off equipment, which is a very low compared to my schedule C income. For a while I was writing off my music equipment, but as my music income is low I don't do that. I use a local tax service and deal with the CPA there. The only way I would actually have to register a business is open a separate checking account for business. My accountant did offer a free fall tax review. I am not worried about it. I don't see how it could affect me now as my occupation is photographer this year. But it is something to keep in mind.

I made a decision when I bought my first camera 25 years ago that photography would never be a hobby and always pay for itself. I tend to take jobs where a camera is one of the tools needed, so I have always written it off. When I did shows I took a loss but didn't claim a lot of the expenses.

I've filed a Schedule C for years, and always declare all income from photography sales. It's taken me several years to purchase the right photography equipment, and I've deducted those costs. Photography expenses have always exceeded sales. Does that mean that, with the new rules, if I file in the red for 2018, the IRS will force me to pay back whatever I've written off in prior years? If so, it would make financial sense for me to eat photography-related expenses for 2018 and just pay income tax on my sales.

Did everyone miss the big debate when the top got that big tax breaK? You can write off your private jet but a teacher can't write off the supplies he/she pays out of pocket for her classroom. The same is happening to small business and hobbyists who have an income.

The operative word here is ‘ hobby’ and how the IRS defines that word.
Running in the red year after year is going to red flag the IRS.

Most years I've made a least a small profit, but I have had a couple of years with losses. It's nice when my small profits were such that I didn't have to pay SS. I have always deducted expenses -cameras, computers, art show tent as Section 129 if I've had enough sales, or depreciation if I haven't. All my other stuff I've also deducted as expenses (that includes the $30 FAA fee). I've always deducted part of my yearly trip to Australia as a travel expense - you can see a lot of my Australian photos here on FAA. One other thing about Wisconsin - yes it costs $10/year for a business license, but you get that $10 back when you pay your sales tax (or even more if you make lots of money).

I will have to consult with a professional before tax time, but in the meantime are you saying that if I get a business license, I can continue to write off expenses even if I'm still running in the red?

This totally sucks. They are hammering the little guy again.

You cannot be a business and run in the red more than 2 years (as noted above) unless, apparently, you are an airline, an oil company, a pharmaceutical company, etc.

I have been filing as a hobbyist every year because my expenses always exceed my income. Mileage to the studio, supplies like paper and ink and clear bags and mats and backing boards and frames, gallery fees, show fees, the cost to build my studio ($40K a few years ago) and the utilities for it, ... NONE of this is deductible any more unless I am a business? How about my $20,000 South America and Antarctica cruise? Hahaha!

OK, to become a business requires paperwork and careful maintenance of all kinds of records (I already do that) but they will want them itemized now instead of a lump sum equal to income. I am retired, living on social security, and take in maybe $5,000 to $6,000 a year gross in art sales. As I said, my expenses far exceed that but I have fun with my hobby. I suppose another $1,500 in taxes won't kill me, but it does piss me off.

So, here is an idea. BEAT THEM AT THEIR OWN GAME. Play the way they do. Run your business in the red for two years. Go bankrupt. Close the business. Start a new one. Go red two years. Rinse and repeat. Get huge tax refunds every year.

I wonder if that actually would work?

Kathleen, no if you run in the red as a business too long they will audit you. Then they tell you-you can no longer be a business and are a hobby. The new tax changes are only good for the very wealthy the little guy will pay the price or in this case the taxes.

I do not get this become a business idea. It is too vague how people are saying it.

Either you are filing as a corporation or a professional. Artist is considered my profession for filing my personal taxes. I do not need to incorporate.

In the state of Connecticut, I have registered to file business sales taxes. The state permit was $100 for as long I want to hold the permit. No renewals ever necessary.

Dave
Post Modern Artist

I wonder if the IRS will bother with such small potatoes? Both my income and expenses are chump change. An audit will cost the guvmint way more than my deductions. Whoops! Guess I answered my own question. Since when did the guvmint care about how much money they waste foolishly?

Kathleen,

Policy, trying to separate it from political ideology, at the IRS shifts from NOT investigating the rich who have a lot to hide etc.....and therefor steering IRS budgets into investigating the poor thereby wasting the budget. Back to investigating the rich and leaving the poor alone.

Guess where we are right now.

Dave
Post Modern Artist

John

You don't have to go bankrupt.

Just show at least $1 profit every third or fourth year.

John, you aren’t really suggesting people file bankruptcy, are you?
Heavy consequences and nope, you can’t just do it again in a few years.....
Bankruptcy follows you for a very long time.
That suggestion is more like cutting off your nose to spite your face.

Kathleen, do not be fooled who the IRS deems worthy to audit. Small businesses are easy money to them because they know we don't have the funds to fight them for long. IRS officers get a % of what they collect. After 9/11 when big corporations got bailouts the IRA went after small businesses for losing money that year. Almost every artist I knew that year was audited including myself. Your best defense is a good accountant who knows the art business.

Just call me Sgt. Schultz. I know nothing!

I've always done my own taxes. Might be time to hire someone. Strange to do since I was a government budget manager for 25 years....

Kathleen,

From 2001 to 2009, the IRS went primarily after people taking the earned income tax credit. The average income in that group was around $7000 per year. This wasted much of the IRS budget. That was the idea. About one in every hundred earned income tax credit filers was audited. Only audited in writing. No major audit. Just a hassle in several letters, with a tax bill for taking the credit. Appeals in writing were taken. More of the budget at the IRS wasted.

Often the excuse for the audit was a typo on the return or something minor.

This is documented in David Kay Johnston's book, "Perfectly Legal". Johnston is one of the finance writers for the NYT. He has written several books on the tax code.

Addition, During those years some 500 IRS lawyers working on cases involving very wealthy people were shifted to writing letters and doing follow through on people claiming the earned income tax credit.

Dave
Post Modern Artist

Do people really expect the IRS to reward people for bad business decisions like overspending on equipment and elaborate studios?

Dang!

Ed,

It is much more than interesting who is rewarded.

Dave
Post Modern Artist

Kathleen, there are random audits. Not all are based on income, just the unluck of the draw.

A hobby is a hobby. Right? "A hobby is a regular activity that is done for enjoyment, typically during one's leisure time." One really shouldn't be expecting to make a earning from a hobby.

A business on the other hand is concerned with making an income. I.e. more money flows in then flows out. If you run your business so poorly that it doesn't make any money five years in row, it's considered a hobby because a business is expected to make money or go out of business.

Of course the IRS is not going to let you write off all kinds of personal expenses for a hobby --- like vacations and home improvement projects. Or even coats made out of Ostrich.

LMAO.....nevermind.....

Dave
https://Bridburg.com