Tax filing for hobbyists

[robert_k1]

These are tax questions for those who are hobbyists (i.e. NOT

incorporated) and have photo related annual sales between $1K and $5K.

 

- Do you report your sales as income?

 

- If you do, do you use Schedule C?

 

- Do you file for a gain, a loss, or a break-even?

 

- How do you account for the costs of equipment and media that are

not entirely used for the sales?

 

- What records do you keep?

 

Dan Heller's book is very helpful on many photo business issues. But

how to handle tax in this situation is less clear.

 

Thanks.

[cameron_rautmann___holt__m]

Register your business with your city/county and get a CPA. I can't stress this enough.

[blake_abbott]

The IRS has publications that outline this situation. It is not difficult at all to do. Basically you list income and expenses (for which you have documentation). As I recall, this is done on a Schedule C. You can apportion expenses for the business and personal use as long as you can verify it. Your other option is to buy a piece of tax software like "TaxCut" and it will walk you through it. For someone with that amount of income, a CPA is probably overkill, unless you're paranoid.

[john_h.1]

If you repair cars as a hobby and were paid for it, you would probably ask a tax professional you questions, not a auto repair shop. I hope. Having a camera or a camera business does not magically make one qualified to provide tax advice. While there may be some who know the answers to your questions, you are not in a position to know if they are accurate even if the answers sound confident. Cobsult a CPA.

[steve_b3]

Definatly find yourself a professional CPA or tax preparer.

[keith_van_hulle1]

I'm amazed that you would think to base your tax return on suggestion you receive here. Wow.

[art_haykin]

In nearly 40 years as a pro, I had a contract with my CPA:He didn't take pictures for money, and I didn't hand out tax advice.BTW, "Sales" are not "income," PROFITS are income. (This is a fact, not advice.)FACT: Oner does not file separately for any incidental side income, such as interest, dividends, or a profitable hobby, etc. All income is taxable, except, perhaps, things like non-taxable municipal bonds, et al. If you earn as little as $1000 on the side, it increases your tax liability accordingly if you are earning a regular salary. Income is income, and it you don't declare certain income, you COULD get caught. The IRS picks up cheaters on routine audits. If one of your photo clients should be audited, and your name is on a paid out check, they often follow through on such expenditures and check them out. If you should get a call or visit from the IRS, or from your state tax board, you'd better have an explanation ready for any undeclared income.The chances of it happening are rather small where relativelysmall amounts are concerned, but the tax guys are SHARP, and getting caught could get sticky. There isn't ONE dodge they don't know about, trust me.

[bill_thorlin]

A professional will not necessarily save you tax but if you provide all details in a usable form ( as set out in one of the links above ) they should not cost you a great deal and their charges will be allowable against your income.

 

What a professional should do is make sure that you submit the information to the Revenue in a timely and correct manner - if not they have not done their job correctly and lay themselves open to appropriate action which should cover any losses and additional expenditure you may face.

 

I am speaking in a UK context but would suspect that there is so little difference in the two systems as to be inconsequential.

 

( You could of course say I have a vested interest ! )

[Jerry_]

After the first year that you identify yourself as trying to make money through your 'hobby,' the IRS may (or may not) allow you to contribute quarterly income (and self-employment) tax payments that the IRS will be kind enough to hold for you until you file your tax return. [You may get three years of not earning anything before the IRS ...kind folks they are ... determine you are not a business, and you have 'zero' tax deductions for the 'income' you earned the past three years -- even though it was a 'hobby.']

 

 

 

Best advice is (as noted above) find an accountant. Or take three or four business courses at the local community college.

 

 

 

 

As a 'hobby' shooter, none of your expenses are deductible (film, processing, prints bought to re-sell) but if you go the route of having a business bank account, collect sales tax, and are a 'legal' small business...you keep good records of how much you spent to offset how much you 'earned.' The result is the income part of your 'hobby,' and the IRS wants you to share some of your $$$$s earned.

[thomas_sullivan]

carolyn...your article goes into detail very nicely if you want to claim photography as a business and what you should do to prove income and expenses. But there is nothing that talks to the hobbyist who doesn't want to make any money. Is there such a thing as deductions for a photography hobby that definitely does not involve making money, therefore, not being a business?

[thomas_sullivan]

let me fine tune that question.....is "hardware" (not consummables) deductible as a hobbyist that makes no sales at all?

[Jerry_]

"Is there such a thing as deductions for a photography hobby that definitely does not involve making money, therefore, not being a business?"

 

 

 

No.

 

 

 

The answer applies to surfboards, lenses, make-up kits for the Mrs., et al. You have a hobby, nothing to deduct as you elect to spend your funds for your personal enjoyment. The IRS is not like our president in regards to creating tax-breaks for photographers.

[thomas_sullivan]

that does seem logical Gerald...but taxes have nothing to do with logic in my experience......heh. I could definitely see lobbyist for some hobby manufacturer slipping something in if the powers to be wanted to bolster that type of businesses profits. I have no spedific businesses in mind, but I don't think it's beyond them doing it.

 

I just thought I'd ask someone who seems to be fluent with this sector of tax laws.

[heatherforcier]

<p>Definitely work with a tax accountant, there is no substitute. That said, I just wrote an article to help photographers prepare for a meeting with their accountant, which includes information on where you can expect to report hobby income, where you can expect to report hobby expenses, and the limitations.</p>

 

<p><a href=http://www.naturescapes.net/022006/hf0206.htm><u>Tax Time for Photographers.</u></a></p>

[eric merrill]

When it comes to something as unimportant as having a government agency hound you over unpaid taxes, I would suggest going straight to the source. Go to the web site of the IRS. They have several publications that explain the difference between hobbies and businesses and what you can and cannot deduct for a hobby. I would not trust a 3rd party to accurately summarize the law for me unless I were paying that person for a professional opinion.

 

That said, I'll now summarize for you. :) If you are running a business, you can deduct losses against other income. If you are dabbling in a hobby, you cannot.

 

Any net income you make is taxable regardless of hobby or business status.

 

 

Eric

[blake_abbott]

Some good points have been brought up here. One thing that does come to mind is that a significant amount of taxes (self-employment, fed, state) goes unpaid every year for the fact that the time and resources required to comply with the overly complex reporting/filing requirements of the IRS are not worth the hassle to those with sales ( or income) of $1000-$5000 a year. For a full-time (or part-time) small business, the requirements certainly need to be met, whether done by yourself or an accountant. AFAIK, a person CAN move from "hobbyist" to "part-time business owner" IF he wants to meet all of the filing/recordkeeping requirements.In the past, I have done all of the recordkeeping and tax filing required for my own small business, not because I was cheap, but because I could do it. If you can't or don't want to invest the time, by all means, hire it out. But, it's really not that difficult. My situation may be not ordinary, however. My degree is in mathematics, so I am used to following arcane and sometimes confusing instruction sets, i.e., tax filing/reporting instructions!

[robert_k1]

Thanks for all the responses, especially to Carolyn and Heather for their fine articles. If I ever need an photo attorney, I know who to call.

 

Thomas asked, "But there is nothing that talks to the hobbyist who doesn't want to make any money. Is there such a thing as deductions for a photography hobby that definitely does not involve making money, therefore, not being a business?"

 

I think IRS refers to this as a "not-for-profit activity". In the following link, they use Ida (who I doubt is a photographer) to illustrate how to report income and expenses for a "not-for-profit activity". Since the two cancel out each other, there is no net gain or loss, and Ida pays no tax on the income from the "activity".

 

http://www.irs.gov/publications/p535/ch01.html#d0e896

 

Thomas also asked, "let me fine tune that question.....is "hardware" (not consummables) deductible as a hobbyist that makes no sales at all?"

 

If by "hardware" you mean a Photoshop work station which you use to produce and sell prints, then I think the answer is yes according to the Ida example. The machine's depreciation is deducted.

 

For the hobbyists in the twilight zone of generating some small income but not enough to start a business, reporting photo income as a "not-for-profit activity" can be a good solution.

 

- You meet your obligation to report your income without having to start a business.

 

- While you cannot claim any loss, you don't pay tax either.

 

- The reporting is not any more difficult or painful than making other miscellaneous deductions.

 

- You maintain a photo income tax reporting history. If or when you are ready to start a business, this history may become your track record for IRS.

 

[Disclaimer: I am NOT an attorney NOR am I a CPA.]

[heatherforcier]

Robert, that is a good link - it's a good example of how hobby activity is reported. Many people do photography for the fun of it, with no intentions of making it a business. While any income that occurs from those activities should be reported as income, there are opportunities to deduct some of the expenses. However, they are limited - as shown in the example (and in my article), someone engaged in a hobby won't be able to deduct expenses that exceed their income. And, in some cases, the deductions are reduced.

 

In the IRS example of Ida, keep in mind her miscellaneous deductions are subject to 2% of her adjusted gross income. For example, if her income from wages that year is $30,000, she will lose $600 of that $1,600. Even worse, if Ida doesn't typically itemize deductions at all (for instance, if she doesn't own her own home and deduct the mortgage interest and real estate taxes), a comparison of her standard deduction ($5,000 for a single person in 2005) with her itemized deductions (assuming $30,000 AGI, only $2,600 from hobby expenses), may find she is better off using the standard deduction, meaning she isn't getting to deduct any of the hobby expenses at all. Net result for Ida in this case is that she is paying tax on all of the hobby income without the benefit of any deductions she didn't already have with her standard deduction.

 

There is a lot more to it than meets the eye, and as I said in my article there is no substitute to talking with a tax professional.

[argv]

The original set of questions posted in this thread ARE addressed in my book (despite the fact that the poster said they weren't). The problem with *answering* these questions, however, is that they aren't binary. The first mistake people make is thinking that there is a single "correct" way to file returns or prepare taxes, and there isn't. There are many ways to do this correctly--which you choose should be the one that is most advantageous to you based on your particular circumstances. Some people are better off incorporating, which means they should file taxes as a corporation. Which kind of corporation may depend on how you financed your company, or whether you have an angry ex-spouse, or if you want to prevent your evil step-children from inheriting your business when you die. Unmarried hobbyists who spend most of their time in caves may do just fine filing as an individual using a schedule C. there are pros and cons to each choice.

 

Whether you report a gain, loss or break-even is also based on what makes sense for you. You have some flexibility in this when you're a company, and/or by choosing whether you want to file on a cash basis, or an accural basis as examples.

 

Etc. etc.

 

As someone else pointed out early in the thread, I hope that you don't make any business decisions based on what you read in a forum. You need to digest and understand the bigger picture of how taxes are dealt with, because there is no black and white answer. I assure you, that no matter what you do, you WILL get in trouble if you don't know exactly WHY you're doing whatever it is you choose. Accordingly, if you do know why things are done and when, you'll find your questions take less of the form, "do you do X", and more of them form, "what are the advantages of choosing method X over method Y".

 

dan