Today TaxMama hears from Kari in the TaxQuips Forum who doesn’t know what to do. “I am an artist/crafter who occasionally sells at festivals and art fairs. I do not have a storefront, nor do I sell my items on my own website. I do not have a business license (and am not required by the state); but I do have a merchant account so that I can accept credit card sales. How am I supposed to claim this income on my tax return? As a small business? Or as income made from a hobby?”
You’ve done your homework. Well done!
First of all, I always recommend that you use a separate account for your business. Aside from making the income and expenses easier to track and account for, if you’re ever audited, you don’t need to show IRS all your personal transactions. So to answer your last question first, it’s a good idea to have a separate account. It’s not the law. Just common sense.
Should this be a hobby or a business? A lot depends on intent.
a) Do you intend for this to be an income-producing enterprise?
b) Or are you just dabbling and don’t care if it loses money?
If the answer is (a) this is a business and should be reported on Schedule C. If (b) it’s a hobby. You report the income on Line 21 of your Form 1040.
You get penalized with the expense deductions:
1) They go on Schedule A, as Miscellaneous Itemized Deductions, and you lose the first 2% of all your expenses because of the formula in that part of Schedule A.
2) The expenses you may deduct are limited to the income you collected.
3) If you don’t normally itemize, you may still not have enough expenses to itemize, so the expenses are wasted.
Generally, a good rule of thumb is, if your handicrafts always produce a profit, use Schedule C. If they usually generate a loss year after year – and you do nothing to change the pattern, use Line 21.
You can find more about this in IRS Publication 334 https://www.irs.gov/publications/p334/index.html
Enjoy your art – sometimes, there’s a lot more to life than money! But…it never hurts to get paid for what we love to do.
And remember, you can find answers to all kinds of questions about hobbies vs businesses, and other tax issues, free. Where? Where else? At www.TaxMama.com.[Note: If you were subscribed to the e-mailed TaxQuips, you’d be getting other exciting news and tips by e-mail, that never appear on the site. Please click on the join TaxMama.com link – it’s free!]
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