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elaine clapper

Taxes - Business Or Hobby?

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2014 was the first year I have had a vender's license (OHIO) and sold work at art festivals.  There were a lot of one time expenses..tent..display tables..lighting...   I sold about $4000 but my expenses were slightly over that. Do I file as a hobby or a small business?

 

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I agree you should talk to an accountant. My opinion is you should file as a business. If you file as a hobby, you can claim the income under "Misc Income" but you have nowhere to claim the expenses. If you file as a business (on a Schedule C), you can claim the expenses too, and the net loss will lower your overall tax bill. I think the rule is you can have a business with a net loss for up to four years (but I'm not sure, take an accountant's word over mine). But I know you can claim a net loss for at least this year. Sounds like 2015 won't include these startup costs, and you'll be operating with a profit from now on.

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I think the loss is 7 years without scutinty- or at one time it was 7 years.I also would do the business vs hobby if you are planning on continuing with clay sales.

The net loss will offset taxes in you other tax life.

Mark

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My understanding is it is three out of five years showing a profit..... to escape audit.  If it is less than that... then the deciding audit factor is the question of whether the operation is clearly being run like a business intending to eventually turn a profit.  Such as advertising, separate business accounts, normal business expenses, pr oper accounting, and so on.  There is no law that you have to be a GOOD business person... just that you have to be trying to make a profit.

 

But you never want to have to prove that with the IRS if you can help it.

 

best,

 

...................john

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Now the three years sounds about right-maybe the 7 years was an itch with your mate?

I have a potter friend who was audited a few years back due to expenses of doing 20 shows that year (darn near killed him)

He hired a big dollar tax rep. long story short

They told him after reviewing the reciepts not to worry and sent him home.Turns out it cost a lot to do 20 shows they found out-most where out of state.

Mark

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As a hobby business you are allowed to subtract direct expenses but you can't use excess expenses to offset other income on your taxes. They also have a way for you to handle the startup expenses. Hey accountants are great but I really recommend that you never just go with their advice. Always follow through with your own research and then bounce conflicting results off of them, a good accountant should be cool with this, I have shown my various accounts over the years plenty of things they had wrong and they appreciated it or at least acted like they did. The amount of information they have to stay on top of is huge and things like this they may get wrong.

 

http://www.irs.gov/uac/Business-or-Hobby%3F-Answer-Has-Implications-for-Deductions

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I would approach this decision with your intentions going forward in mind -- is it indeed your intention to try to make some money selling your pots in the years ahead (business)? Or are you just doing this for fun, merely hoping to cover at least some of your costs (hobby)?

 

(And if it is a business you are running, you do need to treat it like a business as John states -- dedicated bank account, business insurance, etc....)

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I spent a lot of years working in the high tech field, most for venture backed start-ups that did not make money for years!  So I would agree with the comments in this thread that say, run it like a business and as long as your losses are documented, the IRS can not demand that you be profitable, otherwise a third of Silicon Valley would be put out of business!

JBaymore likes this

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