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I can't imagine why the OP even asked about this.
Who would even know your business, if you didn't ask about it on the internet?
Do you think everyone who sells something to someone wonders about this?
OR they just sell a friend a sofa for 800 bucks and go on about their business.....
I talked to my accountant, he said that even though the $1800 would be a small portion of my 2018 income, it is income. Similarly, I buy a 1968 Mustang for $3800, then rebuild it in my garage and sell it for $35,000.
Well, good set of questions there. When does a hobby become a business, intent? Sales tax, FICA, SS, ACA obligations, work place regulations (zoning, fire code), 401k, equipment investment and depreciation... tricky.
I am not a tax pro, but the IRS is actually pretty clear:
Quote:
Originally Posted by https://www.irs.gov/publications/p535
Not-for-Profit Activities
If you do not carry on your business or investment activity to make a profit, you cannot use a loss from the activity to offset other income. Activities you do as a hobby, or mainly for sport or recreation, are often not entered into for profit.
The limit on not-for-profit losses applies to individuals, partnerships, estates, trusts, and S corporations. It does not apply to corporations other than S corporations.
In determining whether you are carrying on an activity for profit, several factors are taken into account. No one factor alone is decisive. Among the factors to consider are whether:
You carry on the activity in a businesslike manner,
The time and effort you put into the activity indicate you intend to make it profitable,
You depend on the income for your livelihood,
Your losses are due to circumstances beyond your control (or are normal in the start-up phase of your type of business),
You change your methods of operation in an attempt to improve profitability,
You (or your advisors) have the knowledge needed to carry on the activity as a successful business,
You were successful in making a profit in similar activities in the past,
The activity makes a profit in some years, and
You can expect to make a future profit from the appreciation of the assets used in the activity.
Presumption of profit. An activity is presumed carried on for profit if it produced a profit in at least 3 of the last 5 tax years, including the current year. Activities that consist primarily of breeding, training, showing, or racing horses are presumed carried on for profit if they produced a profit in at least 2 of the last 7 tax years, including the current year. The activity must be substantially the same for each year within this period. You have a profit when the gross income from an activity exceeds the deductions.
Do I have to report personal items that I sold?
Let's say you sold your dining room set at a garage sale, or you sold your bike on Craigslist. Are you supposed to report the money you received?
The answer is, only if you sold it for more than what you originally paid.
Most of the time, personally-owned stuff like cars, appliances, clothing, furniture, and other household items decrease in value after the initial purchase. If you later sell them, it's almost always for less than what you paid, so there's no gain to report. (Or loss – the IRS won't let you deduct losses on personal items.)
But what about that "vintage" nut grinder you purchased for $5 in 1972 and recently sold on eBay for $75? Yep, you'd have to report the $70 profit as an investment sale.
What about selling a gift? Or something I got for free?
The original purchase price is considered to be what the giver – not you – paid for it.
So, if you received a $100 espresso machine as a wedding gift, and later sold it for $25, there's nothing to report.
On the other hand, if you sold your espresso machine gift for $250, you'd report the $150 profit as an investment sale ($250 selling price minus the $100 purchase price paid by the giver).
So OP, certainly you wouldn't pay tax on the full $1800. You'd subtract out all the costs related to making the items, the materials, the class and the labor hours times a reasonable hourly wage. Just out of curiosity, how much were your costs?
Also, I have gone through a full audit and as long as I could explain and prove how I came up with the numbers, the auditor accepted it. The fact that you kept the detailed records is excellent.
So OP, certainly you wouldn't pay tax on the full $1800. You'd subtract out all the costs related to making the items, the materials, the class and the labor hours times a reasonable hourly wage.
No, the labor is not a cost as an individual has no tax basis in their own labor. If they paid someone else, that would be included.
Do I have to report personal items that I sold?
Let's say you sold your dining room set at a garage sale, or you sold your bike on Craigslist. Are you supposed to report the money you received?
The answer is, only if you sold it for more than what you originally paid.
Most of the time, personally-owned stuff like cars, appliances, clothing, furniture, and other household items decrease in value after the initial purchase. If you later sell them, it's almost always for less than what you paid, so there's no gain to report. (Or loss – the IRS won't let you deduct losses on personal items.)
But what about that "vintage" nut grinder you purchased for $5 in 1972 and recently sold on eBay for $75? Yep, you'd have to report the $70 profit as an investment sale.
What about selling a gift? Or something I got for free?
The original purchase price is considered to be what the giver – not you – paid for it.
So, if you received a $100 espresso machine as a wedding gift, and later sold it for $25, there's nothing to report.
On the other hand, if you sold your espresso machine gift for $250, you'd report the $150 profit as an investment sale ($250 selling price minus the $100 purchase price paid by the giver).
So OP, certainly you wouldn't pay tax on the full $1800. You'd subtract out all the costs related to making the items, the materials, the class and the labor hours times a reasonable hourly wage. Just out of curiosity, how much were your costs?
Also, I have gone through a full audit and as long as I could explain and prove how I came up with the numbers, the auditor accepted it. The fact that you kept the detailed records is excellent.
I think most of the time the auditors are questioning the expenses you are deducting as opposed to undeclared income which would require a bit of detective work to find, and more than likely $1800 worth of possible income wouldn't be worth the work to find it.
I suppose if you got say around $1800 every month or on a somewhat recurring basis, they would ask about it but how would the auditor ever know the OP got $1800 that one time in that one year? Not saying whether the OP should declare it or not, just that it's highly unlikely anyone would ever know. I think there's a legal term called "de minimis" meaning it's too small for people to worry about.
I think most of the time the auditors are questioning the expenses you are deducting as opposed to undeclared income which would require a bit of detective work to find, and more than likely $1800 worth of possible income wouldn't be worth the work to find it.
I suppose if you got say around $1800 every month or on a somewhat recurring basis, they would ask about it but how would the auditor ever know the OP got $1800 that one time in that one year? Not saying whether the OP should declare it or not, just that it's highly unlikely anyone would ever know. I think there's a legal term called "de minimis" meaning it's too small for people to worry about.
Well once he enters the amount on his tax form, he has opened the door for it to be questioned if he ever got audited. That's why it's good that he has records. And the other poster is right, I was wrong, his time and labor would not be deducted.
It depends on what sort of audit you go through, ours was the research audit which meant they went through every line on our return and verified thousands of transactions, even the small ones.
Well once he enters the amount on his tax form, he has opened the door for it to be questioned if he ever got audited. That's why it's good that he has records. And the other poster is right, I was wrong, his time and labor would not be deducted.
It depends on what sort of audit you go through, ours was the research audit which meant they went through every line on our return and verified thousands of transactions, even the small ones.
The old TCMP (taxpayer compliance measurement program) audits. Also known as the root canal of IRS audits because they drilled down until they hit the nerve. Thankfully, they no longer do these.
The point I took away from the OPs post was finding out what the rules actually were. Whether or not they put it on their tax return is a whole other matter. You know the old saying, ignorance of the law is no excuse. Better to be informed and know exactly what your risks are.
The old TCMP (taxpayer compliance measurement program) audits. Also known as the root canal of IRS audits because they drilled down until they hit the nerve. Thankfully, they no longer do these.
Ours was just 2 years ago, the IRS agent told me it was the worst one they do. I think they just changed the name to the NRP (National Research Program).
Some of this is tough too because say with collectibles, I honestly don’t remember what they cost when I bought them or when they were gifts in the case of stuff I had from teenage / college years. It would be too difficult to ascertain the “profit.” I don’t know who would really keep records of that or report it once sold honestly.
I’m also confused about other aspects of tax law where I err on the side of caution and just don’t deduct. I have written and directed a feature film, but my primary business is video production for corporations, though I’m in the union as a director. When I’m writing screenplays clearly my intent is to sell them or profit from them and I’m aware of what it takes to do that, though having never even attempted yet to sell a screenplay, I have no history of profit from that enterprise. I do spend most of my work time writing, though, this year I mean, and each script has incurred minor costs like say $200-300 in research and books purchased (at most). They’ll each cost maybe $1,000-1,500 to submit to contests. So there will be expenses, but maybe there’s no income to deduct the expenses from until years later so I guess you just don’t bother? Or maybe you can deduct expenses later if your endeavors do yield a profit? I’d be more gung-ho about deducting expenses after the first sale or even obtaining an agent, but not right now. I just mark them personal expenses and forget about it.
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