Quick tax question about hobby expenses...not hard either

I'm not a tax expert by any stretch but I figured someone on here knows this.

When you list hobby expenses, does that include every card you buy for your hobby or is it only for expenses such as shipping, eBay, paypal, cost of cards sold that you purchased that same year, etc? I am assuming that just because I buy a card, it cannot be claimed as an expenses unless I sold it.

I know people will say not to go to a message board, but go to an accountant. I just thought I would ask real quick to see if anyone knew.

Thanks in advance for the help!

So it looks like those who have read this don't know either...

tommyfro21 said:

So it looks like those who have read this don't know either...

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most people reading this are not tax professionals.

An activity that is carried on with the expectation of making a profit is considered a business and not a hobby. Even if you only make a profit every few years, the activity may still be considered a business

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http://www.ehow.com/facts_5786814_can-c ... axes_.html

Do you make money collecting cards? If so, then you should start a company and run it as a business. Go ahead and incorprate or get a dba and become legit. If you run it as a business you can deduct expenses in excess of your income. For example, you spent $10000 buying inventory, setting up a website to sell, mileage, etc, and you ended up generating revenues of $8000. For your tax return, you could claim a $2000 loss (cash basis) which would create a tax benefit for you.

If you do not make money....whatever income you make will be offset by your expenses...but only enough to make you break even. You cannot deduct expenses in excess of your income from a hobby. For example, lets say you spent $4000 buying cards and then sold cards for $2000. You would report $2000 in income and $4000 in expenses, but according to the code you will end up a net zero. A hobby cannot generate a benefit for you for tax purposes.

HTH

The hobby vs business question is fairly complicated and depends on your individual situation. The IRS website is going to have your best answers and advice.

http://www.irs.gov/newsroom/article/0,, ... 90,00.html
http://www.irs.gov/publications/p529/ar ... k100026974

A business is profit motivated & a hobby is not. Hobby expenses may be deductible in certain situations.

Read the IRS links above. Like I said, it is fairly complex and there's no free lunch.

tommyfro21 said:

I'm not a tax expert by any stretch but I figured someone on here knows this.

When you list hobby expenses, does that include every card you buy for your hobby or is it only for expenses such as shipping, eBay, paypal, cost of cards sold that you purchased that same year, etc? I am assuming that just because I buy a card, it cannot be claimed as an expenses unless I sold it.

I know people will say not to go to a message board, but go to an accountant. I just thought I would ask real quick to see if anyone knew.

Thanks in advance for the help!

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Can I declare losses from cracking wax?

This is the part I am curious about...

When you say I buy $4000 in cards, are you saying every card I bought whether I sold it or not (all $4000 worth)...that can be counted as an expense, even if I only sell $2000 worth of them and have the other $2000 sitting at home?

This may be why you say I should consider setting it up as a business...

I plan on talking an accountant or a tax professional for tax purposes next year because I do think I could possibly set it up as a smaller, profitable business.

mmalone999 said:

If you do not make money....whatever income you make will be offset by your expenses...but only enough to make you break even. You cannot deduct expenses in excess of your income from a hobby. For example, lets say you spent $4000 buying cards and then sold cards for $2000. You would report $2000 in income and $4000 in expenses, but according to the code you will end up a net zero. A hobby cannot generate a benefit for you for tax purposes.

HTH

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My understanding is that you can deduct hobby expenses up to your income made from it i.e. cancel out the income, but cannot take a loss.

Sitting down with a CPA or other tax professional may not be a bad idea for future use, but the IRS has challenged people's business as a hobby in order to avoid (not evade) taxes.

Brad said:

My understanding is that you can deduct hobby expenses up to your income made from it i.e. cancel out the income, but cannot take a loss.

Sitting down with a CPA or other tax professional may not be a bad idea for future use, but the IRS has challenged people's business as a hobby in order to avoid (not evade) taxes.

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Yeah, I'm really getting a better hang of what I am doing when it comes to buying and selling cards. Tax breaks would be nice, but for me, it's really just making sure I am doing things the right way so if I ever get audited, then I wpuld be okay.

tommyfro21 said:

This is the part I am curious about...

When you say I buy $4000 in cards, are you saying every card I bought whether I sold it or not (all $4000 worth)...that can be counted as an expense, even if I only sell $2000 worth of them and have the other $2000 sitting at home?

This may be why you say I should consider setting it up as a business...

I plan on talking an accountant or a tax professional for tax purposes next year because I do think I could possibly set it up as a smaller, profitable business.

Click to expand...

If you only sold $2000 worth, then you would still have $2000 remaining which are unsold. If you purchased the unsold cards because you like them and wanted to keep them, then they are hobby expenses and seperate from whatever cards you bought for your business. As such, they can not be deducted. If you purchased the cards and intend to sell them, then they are considered business inventory. Purchases made for inventory are part of your cash outlay for the business, and can be deducted.

As an example, using smaller easier numbers:

Purchased 4 cards for $1 each, total cost $4.
Sold 2 cards for $1.5 each. You still have 2 cards in inventory which cost you $2 total.

As a hobby, you had $3 in income. Since it's a hobby, the law states you cannot deduct more than your income, so you are limited to showing $3 in cost. $3 income - $3 cost=$0 profit, no tax benefit.

As a business, you had $3 in income. The income came from 2 cards bought at $1, for a total cost of $2. You have now earned $1 profit in your business and you still have $2 in inventory cost. Your company has generated a profit (assuming no other expenses) of $1. From an IRS standpoint for businesses, you had $3 in income and $2 in cost of goods sold, and $2 cost of remaining inventory. $3 income - $4 cost (cash basis) gives you a loss of $1 which can be used to offset your personal income. In future years, you will sell those two cards for $1.50 each, and will have income of $3.

Keep in mind that business only exist to make a profit, and as such, the IRS states that your business must turn a profit 3 out of every 5 years or they will consider it a hobby.


If you have further questions feel free to PM me and we can talk over the phone. I would recommend talking to a tax expert though. Basically it all boils down to hobby losses cannot help you for taxes. GL