Hobby or Business…or Personal?

Today TaxMama hears from Lisa in California who tells us. “I am a Creative Memories Consultant, which is an independent consultant home sales business. This past year I barely sold anything, and ran my ‘’business’’ as more of a hobby than a business. Do I still need to claim it on my taxes? I haven’t finalized any numbers, but I’m pretty sure there was a loss, no profit.”

Hi Lisa,

To answer you, I need more information. For instance, do you plan to take this business seriously this year? Or are you thinking of just letting the whole thing go? Or are you using the products just for your personal use? The tax treatment will depend on your answer.

If you’re planning to seriously make a go of the business, but just didn’t focus deeply on it last year, do this: Report the income on Schedule C. Deduct your product costs for the merchandise or services you sold. And deduct any other real business expenses. And if you’re really planning to work the business, deduct your office in home expenses, too.

If you’re thinking of letting it all go? Then it was a hobby. Well, they’re going to send you a 1099 for the commissions you received, or the products you sold. You’ll need to report the income on Line 21 of your Form 1040. Unfortunately, you have two strikes against you:

1) You may only report enough in expenses to zero out your hobby income.
2) The expenses must be deducted on your Schedule A.

So if your expenses are less than 2% of your adjusted gross income (bottom line of page 1 of your Form 1040), you won’t be able to deduct them.

Here are IRS’s instructions: http://www.irs.gov/publications/p535/ch01.html#d0e972

And here’s some description of hobbies and hobby income.

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

Here’s how IRS and the Treasury Department feels about Hobby Losses.
http://taxprof.typepad.com/taxprof_blog/2007/09/tigta-bright-li.html

Now, if you only used the product or service for personal use, here’s the last thing you need to know. Since you are going to get that 1099 for the commissions on the items you bought for your own use, report that 1099 income on Line 21 of your Form 1040. Then, also on Line 21 of your Form 1040, deduct the cost of the products ONLY to zero out the income. And make a notation that this was for personal use purchases only.

Ugly, isn’t it. I wish you could do nothing. But you’re going to get that 1099.

And remember, you can find answers to all kinds of questions about hobbies vs businesses, and other tax issues, free. Where? Where else? At TaxMama.com

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