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Welcome to the world of administrative law, nothing is black and white. This is true for a ton of government domains, but tax is the one people interact with m

Welcome to the world of administrative law, nothing is black and white. This is true for a ton of government domains, but tax is the one people interact with most. Do not be terrified of the hobby vs. business designation. If you take some reasonable, intentional steps, you'll be safe. To be specific: do you segregate the materials for your business separate from your personal property? Do you maintain books for your business? Do you have a separate bank account for your business? Do you regularly operate your business to attempt to make a profit, e.g. selling things for more than you pay for them? If so, it's highly, highly unlikely that the IRS will retroactively characterize your business as a hobby. If you're really worried, get an accountant or tax lawyer to review your practices and give you an "opinion letter" stating that you're operating it as a business. If the IRS ever audits you, you can submit this to show that you were acting in good faith. Also, what you wrote implies that you might not be aware of this, but you can deduct all of the costs of operating your business vs. your profits, even if it's just a "hobby". The only difference tax-wise between a business and a hobby at this scale is that you can't deduct hobby expenses that exceed hobby revenue, e.g. a hobby can't generate tax losses, while a business can. If you think you'd be stuck paying taxes on the entire profits of your business without deducting your cost of goods sold and expenses, you've been poorly advised.

jjoonathan 6y ago
Yes, I am taking those steps. > "Opinion Letter" Thanks, I didn't know to ask for that, and now I do. > The only difference tax-wise between a business and a hobby at this scale is that you can't deduct hobby expenses that exceed hobby revenue I used to file as a hobby under that framework, but my understanding (and my accountant's understanding) is that the TCJA nixed it right as its importance-to-me started to heel upwards, forcing me to formalize my intention of becoming a business. I've been putting all of the profit back into the business, but I haven't grown the stones to fully account for my costs and generate a tax loss against my day-job income. Anyway, thanks for taking the time to reply. Knowing what an Opinion Letter is changes things. The fact that I sort of asked after such a thing and my accountant didn't point me in the right direction makes me think I might want to shop around on that front too.
- URSpider94 6y ago
  Two more quick things. One, you probably know this, but a business must make money a certain number of years in a period (I think it’s 2 out of 5, but I haven’t checked that in a while), or else you lose the business presumption. You only have to make $1 in those years, so it’s an easy enough test to meet. Two, if your major business is buying and selling things, even if you treat it as a hobby, you could deduct the cost of goods sold against your revenue. You can always deduct the basis cost of something you sell, people do it all the time for cars, houses, art, horses, etc etc. If COGS is the major cost of your business, then you should always be able to deduct that even if you can’t deduct incidental costs like internet service and accountant’s fees. If your accountant doesn’t agree, time to get a new accountant.

jjoonathan 6y ago

Yes, I am taking those steps. > "Opinion Letter" Thanks, I didn't know to ask for that, and now I do. > The only difference tax-wise between a business and a hobby at this scale is that you can't deduct hobby expenses that exceed hobby revenue I used to file as a hobby under that framework, but my understanding (and my accountant's understanding) is that the TCJA nixed it right as its importance-to-me started to heel upwards, forcing me to formalize my intention of becoming a business. I've been putting all of the profit back into the business, but I haven't grown the stones to fully account for my costs and generate a tax loss against my day-job income. Anyway, thanks for taking the time to reply. Knowing what an Opinion Letter is changes things. The fact that I sort of asked after such a thing and my accountant didn't point me in the right direction makes me think I might want to shop around on that front too.

URSpider94 6y ago
Two more quick things. One, you probably know this, but a business must make money a certain number of years in a period (I think it’s 2 out of 5, but I haven’t checked that in a while), or else you lose the business presumption. You only have to make $1 in those years, so it’s an easy enough test to meet. Two, if your major business is buying and selling things, even if you treat it as a hobby, you could deduct the cost of goods sold against your revenue. You can always deduct the basis cost of something you sell, people do it all the time for cars, houses, art, horses, etc etc. If COGS is the major cost of your business, then you should always be able to deduct that even if you can’t deduct incidental costs like internet service and accountant’s fees. If your accountant doesn’t agree, time to get a new accountant.