When is it a hobby vs business??

[SlickSalmon]

KmH is correct - start locally. State and local governments are far more of a problem for small businesses than the Feds. State sales tax collectors are a particular pain, and they don't give up. If you want the tax benefits of operating as a business, you'll want to form an LLC to make yourself 'official'. That will take a tax ID# and a trade name. Cost and procedures for those varies by state. Since you'll need an accountant to get the tax forms correct (Schedule C), you'll want to figure whether the tax benefits of having a business exceed the cost of tax preparation. In general, if you plan on working by word-of-mouth and not competing too hard with the local pros, you can get by with a lot. The minute you put a shingle out and publicly advertise, you'd better get legit. Personally, having done this before in another field, I'd want to see an income of a couple grand a year before forming a business.

 

[wannabephotog]

You can write off expenses any time. You have to form a company first.
A hobbyist cannot write off anything. If you are going to claim the income, it's best you organize as a business. The government gives you 3 years of claiming losses, before they start giving you the evil eye. You have to start showing profit after three years.

This is correct.
It is scary how much erroneous advice is in this thread.
Even after you organize as a business (register locally, state level and federal level) if you are not showing a profit after 3 yrs the IRS will deem your business a hobby. You may write off expenses the 1st year even if you did not make a profit. The IRS website (irs.gov) has tons of free pamphlets with all the ugly details. There are also a ton of good books available. Accountants charge an arm and a leg, but their initial consultations are usually free.

 

[KmH]

Or you can be like me and since I'm a photography student, all of my photography gear gets written off as student expenses. I haven't made a profit if you add up the amount that I have made from photo sessions with friends and family vs. what I've spent on gear.

I recommend you check with a qualified accountant if you're using the camera gear to make money as a business while you are in school.

And to clarify an earlier statement. There are deductions that can be taken for a hobby.

If your business does not make a profit in at least 3 of the first 5 years it exists, the IRS will re-classify your business as a hobby.

If you claimed any business deductions during that 5 year period, the IRS will disallow those previous deductions when they reclassify it as a hobby and will expect you to pay taxes on the total amount of the deductions taken in that 5 year period.

See http://www.irs.gov/newsroom/article/0,,id=169490,00.html

 

[wannabephotog]

If you want the tax benefits of operating as a business, you'll want to form an LLC to make yourself 'official'. That will take a tax ID# and a trade name. Cost and procedures for those varies by state. Since you'll need an accountant to get the tax forms correct (Schedule C), you'll want to figure whether the tax benefits of having a business exceed the cost of tax preparation.

There is no need to jump on the LLC bandwagon. Most people erroneously believe that incorporating a small business will protect your personal assets and offer more tax benefits. Not necessarily true. Depending on the nature of your business, if you deal with vendors, landlords, credit card companies, banks, etc., they will require you to sign a personal gaurantee that renders the LLC protection null.

Sole proprietors still get great tax benefits and you don't have the headache and expense of incorporating. You won't need an FEIN, you can file with your social security number.

You don't need to pay an accountant for a Schedule C IRS form. The IRS website (irs.gov) has all the free forms and instruction booklets you would need to file as a business.

 

[SlickSalmon]

If you want the tax benefits of operating as a business, you'll want to form an LLC to make yourself 'official'. That will take a tax ID# and a trade name. Cost and procedures for those varies by state. Since you'll need an accountant to get the tax forms correct (Schedule C), you'll want to figure whether the tax benefits of having a business exceed the cost of tax preparation.

There is no need to jump on the LLC bandwagon. Most people erroneously believe that incorporating a small business will protect your personal assets and offer more tax benefits. Not necessarily true. Depending on the nature of your business, if you deal with vendors, landlords, credit card companies, banks, etc., they will require you to sign a personal gaurantee that renders the LLC protection null.

Sole proprietors still get great tax benefits and you don't have the headache and expense of incorporating. You won't need an FEIN, you can file with your social security number.

You don't need to pay an accountant for a Schedule C IRS form. The IRS website (irs.gov) has all the free forms and instruction booklets you would need to file as a business.

I was relaying advice that had come from my accountant. He wanted the business set up as an LLC (which costs very little) in order to distinguish it from a hobby in the eyes of the IRS. The LLC wasn't necessary, just desirable in his opinion, particularly since I was likely to be reporting losses in the early years. The 'protections' of the LLC were incidental and, as you noted, probably easily superseded.

In my state, the act of forming the LLC required a trade name which, in turn, required an FEIN. It was a case of multiple dependency arising from the original decision to form the LLC. I discovered all this in sequence, so setting up the LLC took more time than it should have.

Of course you don't need an accountant for a Schedule C (or any other IRS form, for that matter); I just found one extremely helpful and, hence, costly.

 

[John Mc]

You guys from the states have a confusing Tax system.
I know i can earn up to £14k a year without having to report anything aslong as i have another job and im making a contribution to tax ect. But they'll no doubt be a loop hole ive missed where they'll abuse me if i dont report it :/

 

[KmH]

Our tax statues are written by the wealthy, for the wealthy.

 

[NikonNewbie]

I kept hearing from everyone that I should LLC, to protect myself from bankrupcy, but the accountant did tell me that you had to make a certain amount to qualify for an LLC, there were stipluations...and I did not meet them, I simply used my SS number as a sole proprietr (sp)...
Just really reseach your state laws, etc, it helps to know what is going to be expected of you.
Also, here in DE if you have a busniess that will involve other people besides your self...customers..employees, etc, they REQUIRE you to carry insurance. I almost paid for this until it was later explained that it was only if people were working for me, or if I had ...lets say a place of business where people would get hurt...since I was vending and had an online business I did not need this special insurance.
It's probably different for every state...so as everyone keeps saying...check it all out.
Also, you must have a business plan if you are going to seek a business loan.

 

[Olympus E300]

tax fraud never hurt no one :lmao:

If he were still around, I think Al Capone would be a fantastic fellow to discuss that with. Tax evasion Baby.....Tax evasion!!

Personally, I just got off the phone with my government no less than an hour ago. I had just finished registering a small photography business. Honestly, I am NOT ready for another business (certainly not a photography business) but I had a potential business name "pop" into my head a few months back and I thought that I would like to reserve that name in the event I opted to start a business in the future. I should clarify that I am up in the great white north (Winnipeg, Manitoba, Canada) and after paying $50 to reserve my "potential" name with the government, I was told that then name would only be held for 90 days. At the end of the 90 days, I chose to register a corporation. This way for as long as I maintain the business licence, my chosen name will remain mine. I have no intentions of making any money with this business at this time, nor do I even intend to work with "clients". At best, I MAY sell a print or two online and trickle those funds into the corporation but other than that I have absolutely no plans to pursue work nor income. Furthermore, I do not intend to "write off" any room in my home or any of the many thousands of dollars I have invested in photography equipment.

So...In closing, I've probably confused a million people in that I registered a small photography business just so that I could reserve the name for future use.

1. Will this cost me money?
- Surely!

2. Will I get any kick backs from this business?
- Nope!

3. Why did I register a business?
- More money than brains I suppose...Which isn't alot!!


Just my experience and my $0.02.

Cheers!
- Daniel

 

[MCPorche]

Does anyone know at what point the government considers a hobby turning into a business?

While I'm no CPA, I'd say that the simplest answer would be...."When the money you take in exceeds the money you put out."

 

[SlickSalmon]

Does anyone know at what point the government considers a hobby turning into a business?

While I'm no CPA, I'd say that the simplest answer would be...."When the money you take in exceeds the money you put out."

Unfortunately, this is definitely not true. All income is tax reportable, and the only way you have to offset that income is to deduct it as a business expense. The only way it can be a business expense is if you've got a business. Your hobby becomes a business when you declare it to be so. That declaration brings with it some opportunities and some responsibilities.

 

[Tbini87]

Our tax statues are written by the wealthy, for the wealthy.

In complicated jargon than is difficult for an average Joe to understand or comprehend.

 

[KmH]

LLC statutes are state law, so there are 50 different versions.

The only advice you should listen to is the advice you get from a qualified attorney.

 

[vtf]

If you want the tax benefits of operating as a business, you'll want to form an LLC to make yourself 'official'. That will take a tax ID# and a trade name. Cost and procedures for those varies by state. Since you'll need an accountant to get the tax forms correct (Schedule C), you'll want to figure whether the tax benefits of having a business exceed the cost of tax preparation.

There is no need to jump on the LLC bandwagon. Most people erroneously believe that incorporating a small business will protect your personal assets and offer more tax benefits. Not necessarily true. Depending on the nature of your business, if you deal with vendors, landlords, credit card companies, banks, etc., they will require you to sign a personal gaurantee that renders the LLC protection null.

QUOTE]

Very true.
Seek a professional accountant or you will be doing full time work for a part time job.