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Old 01-27-2011, 06:42 PM   #26 (permalink)
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That's all part of it. If you can show you are in it to make $ first you are ok.

Example can't be answered as given. If a business yes the 5,000 is right. If a hobby you can only claim if you itemize. Its aslo subject to 2% AGI limit in addition. If you make 100k that means only the hobby expenses exceeding 2k (18,000 in your example) is deductible.
What if I'm considered a hobby but do not wish to claim my losses? Do I just ignore it?
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Old 01-27-2011, 07:00 PM   #27 (permalink)
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No you can't just ignore it. You have to report it. Plus because of the 2 limitations most people can't deduct hobby expenses (at least in full to offset income). Again with a hobby you also cannot generate a loss.
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Old 01-27-2011, 07:17 PM   #28 (permalink)
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No you can't just ignore it. You have to report it. Plus because of the 2 limitations most people can't deduct hobby expenses (at least in full to offset income). Again with a hobby you also cannot generate a loss.
See, that's what I'm confused about. The average guy who spends $2000 in a year on wax and sells his non-PC stuff on ebay for $1000 has to report additional income of $1,000 when it was actually a $1,000 loss?

If I bought a TV for $1000, decided 6 months later I didn't want it, and I sold it on ebay for $800, how would I report that on my taxes? And why would cards be any different?
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Old 01-27-2011, 07:24 PM   #29 (permalink)
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If you sell one card you don't. A tv is tangible personal property. Like a car is not subject to taxation. If you have multiple sales and transactions you become a car dealer and report income accordingly. Its a case-by-case scenario. Its not black and white
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Old 01-27-2011, 07:30 PM   #30 (permalink)
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See, that's what I'm confused about. The average guy who spends $2000 in a year on wax and sells his non-PC stuff on ebay for $1000 has to report additional income of $1,000 when it was actually a $1,000 loss?

If I bought a TV for $1000, decided 6 months later I didn't want it, and I sold it on ebay for $800, how would I report that on my taxes? And why would cards be any different?

You are also missing a big piece. You have to report your GAIN on a sale not your gross income. If you have $2,000 invested and you sell for $1,000 you don't have a gain. Your adjusted basis is the amount you have invested in an item. Anything you sell above your basis is the gain a is subject to taxation. If you don't sell anything for more than you are invested you don't have a gain and aren't subject to tax. Don't get your basis and your expenses confused. They aren't the same.
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Old 01-27-2011, 07:32 PM   #31 (permalink)
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That's the stance you can take if you treat it like an investment.
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Old 01-27-2011, 07:32 PM   #32 (permalink)
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I guess my question is why would I have to pay income tax on a hobby that generated no income. If I sold a million dollars worth of cards in a year, but spent two million to obtain those cards, why on earth would I pay tax on it?

Sorry I'm peppering you with questions, but I'm just trying to figure my shite out for this year's return. The effective date for my sole-proprietorship was 10/1/10, so the prior ten months I was not operating as a business. I still had a lot of transactions on ebay in those ten months, but I spent way more than a made. Way more. So how can I be taxed on my hobby if it generated negative income? Everything I've read up until today has indicated that a hobby is only taxable if it is profitable. Is that not the case?
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Old 01-27-2011, 07:36 PM   #33 (permalink)
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Because to the IRS its a hobby not a business and you get personal enjoyment. Same reason meals and entertainment are only 50% deductible.
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Old 01-27-2011, 07:37 PM   #34 (permalink)
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You are also missing a big piece. You have to report your GAIN on a sale not your gross income. If you have $2,000 invested and you sell for $1,000 you don't have a gain. Your adjusted basis is the amount you have invested in an item. Anything you sell above your basis is the gain a is subject to taxation. If you don't sell anything for more than you are invested you don't have a gain and aren't subject to tax. Don't get your basis and your expenses confused. They aren't the same.
This is what I was getting at. I just have a hard time explaining things sometimes.

I'm an MBA, not an English major. Words are hard sometimes.

My actual figures for 1/10-10/10 are approx $27,000 spent (that I have receipts for) and $22,000 made, so that's a loss of $5,000. I wasn't going to report that at all since I figured I couldn't claim a "hobby" loss. But I'm worried that the IRS will ask for justification if they notice all of that money coming in to my bank account via paypal.


Thanks for the help.
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Old 01-27-2011, 07:39 PM   #35 (permalink)
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Feel free to pm me with specifics if you want. I can't give you an easy answer without knowing materiality factors.
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Old 01-27-2011, 07:43 PM   #36 (permalink)
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Id need more than that though. Other income you dad, taxes paid, charity, mortgage income etc. The way the irs usually thinks is ok you make 100k a year. In addition you have 1k of income unexplicably in your bank. That's 1% of other income and is reasonable. Now if you report $5k in income and have $1k in other that looks more suspicious. They like percentages and comparing it to the industry average.
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Old 01-27-2011, 07:44 PM   #37 (permalink)
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Mortgage interest. Sorry I'm on a phone with a small keyboard
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Old 01-27-2011, 09:13 PM   #38 (permalink)
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I just want to say thanks to raiderguy for answering all the questions. Even though I didn't ask them it did make things a little clearer.
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Old 01-27-2011, 09:23 PM   #39 (permalink)
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I'm glad I could help. Another thing guys, look H&R Block is going to charge you a fee per form to complete, and the people there 9 times out of 10 have no idea how to properly prepare a return; or know if what they are doing is right or not. Plus they WILL charge more than a CPA who specializes in taxes. If you guys plan on doing your own return, I strongly suggest taxact.com over Turbo Tax. Taxact charges $13.95 to efile both federal and state (the fee is for the state return; federal returns are FREE. So if you live in a state that doesn't have an income tax you can do yours free). Plus they cover every range of income/expenses and is very user friendly. Why spend more if you don't have to.
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Old 01-27-2011, 11:42 PM   #40 (permalink)
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Ok, basic question here in regards to paypal. Do we start keeping track of these transactions starting Jan. 2011? Or do I need to dig up all my 2010 transactions to turn in this year to my CPA?
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Old 01-28-2011, 12:00 AM   #41 (permalink)
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Ok, basic question here in regards to paypal. Do we start keeping track of these transactions starting Jan. 2011? Or do I need to dig up all my 2010 transactions to turn in this year to my CPA?
Paypal gives you all of your transactions. If you go in to Reports, it has multiple ways to do it. You can download the whole year or by months.

In my opinion (and I have no background in taxes, etc). If you do XX,XXX.XX in total sales for 2011 on eBay/Paypal & file that on the tax return WITHOUT filing anything for 2010, I think the IRS is going to take a look at previous years.

I think that the new rule for the people who will get 1099s & file for the 2011 year of business only because they are "forced to", I think they are going to look back further in to their eBay "business" because substantial figures like that don't come from no where.

And if they look back & see you've been on eBay for the last 3, 4, 5, 6 years+ and haven't done anything about it until the 1099 year, I think you're going to be in a bad position.
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Old 01-28-2011, 12:33 AM   #42 (permalink)
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Paypal gives you all of your transactions. If you go in to Reports, it has multiple ways to do it. You can download the whole year or by months.

In my opinion (and I have no background in taxes, etc). If you do XX,XXX.XX in total sales for 2011 on eBay/Paypal & file that on the tax return WITHOUT filing anything for 2010, I think the IRS is going to take a look at previous years.

I think that the new rule for the people who will get 1099s & file for the 2011 year of business only because they are "forced to", I think they are going to look back further in to their eBay "business" because substantial figures like that don't come from no where.

And if they look back & see you've been on eBay for the last 3, 4, 5, 6 years+ and haven't done anything about it until the 1099 year, I think you're going to be in a bad position.
Great point Rick.
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Old 01-28-2011, 12:35 AM   #43 (permalink)
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If I were to make it a business what type of license would I need? Just a resale license? I want to do it too so I can ride it off. I also want to buy some storage lockers a bit later and want all the right type of licenses.
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Old 01-28-2011, 07:59 AM   #44 (permalink)
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I am not a CPA or even giving adivce on what anyone should do, but something I have seen others do, is:

1) "Incorporate" it as a business one way or another - doesn't cost that much.

2) Dedicate a "space" in your home for your "business". This way you can write off a portion of your heat/electric/gas/mortgage/rent etc.

3) Your business can take a loss for 3 years from what I understand. FREE MONEY!

4) When the "business" fails and takes a loss for three years, close shop, and open (Incorporate) ANOTHER one. Rinse, repeat.

One of the Ex Maryland State Comptrollers is the CPA for a very close family member of mine and their business, and this is what my family member does.

Not advising anyone else do this, but it works for them, and is perfectly legal from what I understand.
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Old 01-28-2011, 08:31 AM   #45 (permalink)
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I am not a CPA or even giving adivce on what anyone should do, but something I have seen others do, is:

1) "Incorporate" it as a business one way or another - doesn't cost that much.

2) Dedicate a "space" in your home for your "business". This way you can write off a portion of your heat/electric/gas/mortgage/rent etc.

3) Your business can take a loss for 3 years from what I understand. FREE MONEY!

4) When the "business" fails and takes a loss for three years, close shop, and open (Incorporate) ANOTHER one. Rinse, repeat.

One of the Ex Maryland State Comptrollers is the CPA for a very close family member of mine and their business, and this is what my family member does.

Not advising anyone else do this, but it works for them, and is perfectly legal from what I understand.
YOU ARE RIGHT!
I can blow tons of$$ on cards and since I have sold 50% of them via my store which is a retail location I can write off ALL of my card expenses. (a ton) which is nice. I spent 48k on cards and made 14k back (all of the nice ones are still for sale and listed as inventory). The other 34k is a tax write off which helps
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Old 01-28-2011, 08:47 AM   #46 (permalink)
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Now they are going after kool-aid stands and garage sells...If you buy from a company taxes are paid. If you buy a box the taxes have been paid on the cards,they are yours to do with whatever you please. Keep the receipt from BO. It looks like the 2000 chaos all over again!!


keep the receipt from bo ? thats funy they never ever send me one. i always ask for it but never get it .


also if i make over 20,000 on ebay along with my 60,000 i make from my regualr job i probably wont be getting a return right ??????
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Old 01-28-2011, 11:26 AM   #47 (permalink)
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Some of the advice being given here is laughable. I really hope the IRS cracks down on these shady tactics. And like Rick said, they are going to be checking past years as well so if you haven't been reporting your income, you are taking a big risk of some huge penalties if your return raises a flag and they go digging into your past dealings...
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Old 01-28-2011, 12:25 PM   #48 (permalink)
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Some of the advice being given here is laughable. I really hope the IRS cracks down on these shady tactics. And like Rick said, they are going to be checking past years as well so if you haven't been reporting your income, you are taking a big risk of some huge penalties if your return raises a flag and they go digging into your past dealings...
This is one of the few times I actually agree with Brad. Some of the stuff referenced above is just asking to take an ass pounding from the IRS. A CPA once told me that a "home office" deduction is the biggest red flag for any small business. If you want to be audited, please claim that the extra bedroom in your apartment or house is a "home office." Also, setting up a tax shelter by starting a new failing business every three years is another giant flag.

The IRS can go back 7 years - so if you start reporting a bunch of stuff this year or next year that you've never reported before, you better be able to prove that you didn't under-report in the last 7 years.

Here's what I'm doing (and I'll have one my CPA buddies look over it) - I'm running a report of all of my Paypal payments for 2010. I am also printing out every invoice/receipt for money I've spent on Blowout, D&A, Big T, Global, C&S, etc. I also saved most of my receipts from the LCS. I will add up the receipt totals to see how much I spent, compare it to my total payments received on Paypal, and report the difference (positive or negative). I am not deducting any personal expenses (such as printer ink, mileage to drive to the post office, shipping costs, bubble mailers, etc) because you are just asking to be audited.

Bottom line - if you're going to play in this "hobby" you need to document everything. If you haven't been saving your receipts, you're probably F'd in the A.
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Old 01-28-2011, 12:29 PM   #49 (permalink)
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This is one of the few times I actually agree with Brad. Some of the stuff referenced above is just asking to take an ass pounding from the IRS. A CPA once told me that a "home office" deduction is the biggest red flag for any small business. If you want to be audited, please claim that the extra bedroom in your apartment or house is a "home office." Also, setting up a tax shelter by starting a new failing business every three years is another giant flag.

The IRS can go back 7 years - so if you start reporting a bunch of stuff this year or next year that you've never reported before, you better be able to prove that you didn't under-report in the last 7 years.
Here's what I'm doing (and I'll have one my CPA buddies look over it) - I'm running a report of all of my Paypal payments for 2010. I am also printing out every invoice/receipt for money I've spent on Blowout, D&A, Big T, Global, C&S, etc. I also saved most of my receipts from the LCS. I will add up the receipt totals to see how much I spent, compare it to my total payments received on Paypal, and report the difference (positive or negative). I am not deducting any personal expenses (such as printer ink, mileage to drive to the post office, shipping costs, bubble mailers, etc) because you are just asking to be audited.

Bottom line - if you're going to play in this "hobby" you need to document everything. If you haven't been saving your receipts, you're probably F'd in the A.

Not completely true. The statute of limitations is as follows:

They can go back 3 years on any return.

They can go back 6 if it's a significant income that was omitted (25% of your gross income shown on your return)

Open indefinately for fraud.
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Old 01-28-2011, 02:09 PM   #50 (permalink)
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A CPA once told me that a "home office" deduction is the biggest red flag for any small business. If you want to be audited, please claim that the extra bedroom in your apartment or house is a "home office." Also, setting up a tax shelter by starting a new failing business every three years is another giant flag.
Well I had my business run from my house for over 10 years. At first it was a spare bedroom. I made a lot of money, and itemized my deductions. NEVER did I get audited. As long as you're not cheating, there should not be an issue. The IRS doesn't know it's a bedroom, they just ask for square footage.

I don't consider a failing business a tax shelter. Just because you don't agree with it, does not make it wrong. Can you show me instances of fact in your opinion, or is it just that?

My CPA tells me the biggest red flag is actually CELL PHONE write offs....People claim the entire phone as business, when in fact, it's not.
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