What is the difference between a hobby/business?

[ilovedolphins]

I was doing my taxes and I am torn between writing my info down as a business or a hobby.

I sew Barbie clothes and sell them on eBay. I mainly did it when the kids were small for extra money. Now I am just doing it to get rid of my fabric and I may not sew after it is all gone.

I made $960 on eBay and paid $230 of that for eBay and Paypal fees.

I have a full time job and do this whenever I have time. I like sewing but don't do it any more for the income.

[Deleted]

To the IRS there is no difference. They want you to claim ALL income.

[mwcpa]

a business must show an "intent" to make a profit, that is the biggest issue one needs to overcome....

your facts note that you are engaged in a hobby and not a business (you do not seem to have an intention to make a profit in the stated facts)... the $960 is reported on line 21 of your income tax form 1040 and the $230 in costs are reported on schedule A as a miscellaneous expense.

In the federal tax law, specifically under Code Section 61, as written by Congress, not the IRS, all income is supposed to be reported unless specifically exempted in the law (again written by Congress)

[ilovedolphins]

I claimed it on my taxes under a hobby. If I ever decide that I want to turn it into a business I will have to stop working the 55 hour work week at my full time job. And I have considered it in the past but not willing to give it a try yet.

[MN-Investor]

As long as expenses do not exceed income, it really doesn't matter if she claims it as a business or a hobby.

[mwcpa]

mn, it does make a difference.....
a hobby's income is included on line 21, a self employed person's income is reported on schedule C
a hobby's costs are noted on schedule A, a self employed person's business costs are reported on schedule C...
the reporting is very very different...proper tax reporting is not about what one can get away with, but disclosing the reality of the situation in as accurate a manner as possible.


Articles from the IRS on the subject
www.irs.gov/newsroom/article/0,,id=169490,00.html
www.irs.gov/irs/article/0,,id=186056,00.html

[taxref]

I agree with the answers given by Mwcpa.

Adding some more, we often use the shortcut term "hobby rules" when describing this situation. The actual term, however, is an activity not entered into for profit. The rules for reporting hobby income and expenses are very different than for a business, and the business vs. hobby issue is a frequent source of litigation in Tax Court.

Based on the information provided, I agree that the OP should report using the hobby rules. Her gross income from the hobby would be entered on Line 21 of her 1040. Her expenses (but not to exceed hobby income) can only be claimed as a 2% miscellaneous itemized deduction. Any profit, however, is not subject to self-employment tax.

[rangerj]

NOTES:
The tax code has not used the term "HOBBY" since about the late 1970s. The statute says "an activity engaged in for reasons other than a profit motive (paraphrased)". The bone of contention is when such an activity results in a loss. Personal losses, such as ones due to a "hobby", are not deductible, and as pointed out by MWCPA the deductions are treated differently because they are section 212 expenses (incurred in the production of income), and are NOT section 162 expenses (trade or business expenses). Positive income from any activity is reported for tax purposes, but a loss is not deductible if the activity is engaged in for reasons other than a profit motive, that is a hobby.

[commentator]

rangerj, taxref and mwcpa provided very useful answers. MN and Archie, in my opinon, need to be a bit more careful about glib, overly simplistic answers to complicated tax questions.

[Deleted]

Feb 16, 2011 17:10:43 GMT -5 @commentator said:

rangerj, taxref and mwcpa provided very useful answers. MN and Archie, in my opinon, need to be a bit more careful about glib, overly simplistic answers to complicated tax questions.

The only reason I am here is to be glib...

[commentator]

Feb 16, 2011 17:13:28 GMT -5 ArchietheDragon said:

Feb 16, 2011 17:10:43 GMT -5 @commentator said:

rangerj, taxref and mwcpa provided very useful answers. MN and Archie, in my opinon, need to be a bit more careful about glib, overly simplistic answers to complicated tax questions.

The only reason I am here is to be glib...

As long as we know and as long as you don't mind having it pointed out over and over again for the benefit of new members.

[Deleted]

Feb 16, 2011 17:16:33 GMT -5 @commentator said:

Feb 16, 2011 17:13:28 GMT -5 ArchietheDragon said:

The only reason I am here is to be glib...

As long as we know and as long as you don't mind having it pointed out over and over again for the benefit of new members.

I don't mind.

[commentator]

Feb 16, 2011 17:17:47 GMT -5 ArchietheDragon said:

I don't mind.

We will see about that.

Just remember to take all comments in the spirit in which they are intended.

[ilovedolphins]

I just have the totals of the income and fees. Should I have an itemized list of them also for the IRS? Like each item I sold and how much I got for them and the fees for each item?

[TheOtherMe]

Since the expenses are a miscellaneous expense on Schedule A, they are subject to the 2% of AGI limitation.

[mwcpa]

"I just have the totals of the income and fees. Should I have an itemized list of them also for the IRS? Like each item I sold and how much I got for them and the fees for each item? "

You should have as much detail as possible in your documents to support positions on the tax filing (do not send it to IRS) in case you ever are asked to substantiate the amounts. Supplying the summary (total collected income on line 21 of page 1 of 1040 and summary of expenses incurred by major category on schedule A) on the tax filing is all that you need to do. Keep these records for a period of not less than 3 years from when you file the tax return or April 15, 2011, which ever is longer.