Forum: Author Hangout

If you can convince the IRS it's not a hobby.

My parents used to run a small portrait studio, so I know a bit about this. The biggest problem for business vs hobby is if you show a net loss too many consecutive years*. To be a business you actually have to be making money doing it.

Of course, if you incorporate, then that's not an issue, but the business has to file corporate income taxes separately from your personal income taxes and that gets a lot more complicated.

*No, I don't recall the exact cutoff and it's been decades since my parents closed the studio, so it may well have changed since then.

Isn't Twitter losing 4 million dollars a day?

Twitter is being run as a hobby now.

Amazon ran for years before it started making a profit. I think YouTube never even got to that stage before Google bought them out.

After all, didn't FedEx lose money their first 10 years? Isn't Twitter losing 4 million dollars a day?

Those are corporations. A corporation pays taxes separately. Corporations aren't relevant to the issue.

The issue is with partnerships and sole proprietor ships for which the taxes are handled on the owners personal income tax returns.

In those cases, if a business claims a loss too often, the IRS can (they don't have to, but they can) declare a non-incorporated business to be a hobby and disallow claiming business expenses on the owners income tax returns.

That might be the situation in the USA, other countries have no problems to declare even the equivalent of Limited companies as hobbies.
(background such companies do use balance sheets and as such can accumulate losses over many years that can be used to balance profits a decade later)

other countries have no problems to declare even the equivalent of Limited companies as hobbies.

Maybe, but the thread is about US taxes so...

(background such companies do use balance sheets and as such can accumulate losses over many years that can be used to balance profits a decade later)

Up until a tax code change in 2018, US real-estate businesses in particular could carry over losses for an indefinite time frame, and they weren't the only ones as I recall. Pre-2018 losses are still grandfathered, but anything after then now has a "use by" date after which it can no longer be used.

Many years ago, when I was a self-employed contractor, I would typically gross in excess of $150,000 per year. By the time I was done with my Schedule C, I would have reportable taxable income of about $50. Not $500, or $5,000, but $50. You simply have to be smart about it.

Have we done time together?

I have never been convicted of any crime. No witnesses. :)

Actually, I've only had one speeding ticket over the years, and that's it, too.

You avoided admitting that the reason for speeding was to go buy a shovel, quickly!!!!

:)

You avoided admitting that the reason for speeding was to go buy a shovel, quickly!!!!

Quicklime. That takes care of the odor and decay so cadaver dogs can't find it if you've gone deep enough.

Shovel? Quicklime? Burying techniques? You mean, you goes just to don't eat...never mind.

Sometimes, reading these forum posts, I become totally amazed at how far from the original topic the comments get. The rest of the time I am convinced that the entire goal of these forum posts are to see just how far off-topic a tangent can go...although I am still unsure of who is the current record holder. Hmmm....

just how far off-topic a tangent can go

You would have to ask Gina Marie Wylie if you want an answer to that.

Sometimes, reading these forum posts, I become totally amazed at how far from the original topic the comments get.

Once the initial question is answered, people have to talk about something.

(I've never been jail/prison, but saying that would have ruined my joke.)

Or have I....

I'd have too many questions to be quiet:

How many prisoners were there?
Their last meals?
Who went out crying?
Who went out with stoic acceptance?
Any last minute confessions (about anything)?
Who'd you feel sorry for?
Did you meet any of their family members and what mental state were they in?
What commonalities did the people sentence to death have (other than being sentenced to death)?

I'm sure I'd have more, but you get the picture.

You probably have two forearms even if you don't get four warnings.

You probably have two forearms

Wouldn't that give you eight arms?

If not, and you get a 1099, how can you not declare it as income?

AFIK, you were technically required to declare the income even before the 1099 requirement.

https://www.irs.gov/businesses/small-businesses-self-employed/how-long-should-i-keep-records

Period of Limitations that apply to income tax returns

1. Keep records for 3 years if situations (4), (5), and (6) below do not apply to you.
2. Keep records for 3 years from the date you filed your original return or 2 years from the date you paid the tax, whichever is later, if you file a claim for credit or refund after you file your return.
3. Keep records for 7 years if you file a claim for a loss from worthless securities or bad debt deduction.
4. Keep records for 6 years if you do not report income that you should report, and it is more than 25% of the gross income shown on your return.
5. Keep records indefinitely if you do not file a return.
6. Keep records indefinitely if you file a fraudulent return.
7. Keep employment tax records for at least 4 years after the date that the tax becomes due or is paid, whichever is later.

6. Keep records indefinitely if you file a fraudulent return.

Uhm, yeah, keep the evidence, typical bureaucratic point :D

Uhm, yeah, keep the evidence, typical bureaucratic point :D

I noticed that. It's basically 3 years, unless you are claiming a loss for worthless securities or are cheating on your taxes.

4 and 6 are both basically about cheating on your taxes.

4 Not reporting income. 6 other tax fraud.

5. There are a few legitimate reasons for not filing, but then if you are not filing for legitimate reasons, you probably don't have a lot of records to keep.

I prefer accidentally erroneous.

And if it was accidental, you would have no idea that you fell into one of the longer record keeping categories.

It also lets them tack on statutory fines and penalties for failing to keep the records

As I understand it, no it doesn't.

Those numbers are based on statutes of limitations that apply to tax adjustments.

From the link I posted up thread:

The length of time you should keep a document depends on the action, expense, or event which the document records. Generally, you must keep your records that support an item of income, deduction or credit shown on your tax return until the period of limitations for that tax return runs out.

The period of limitations is the period of time in which you can amend your tax return to claim a credit or refund, or the IRS can assess additional tax. The information below reflects the periods of limitations that apply to income tax returns. Unless otherwise stated, the years refer to the period after the return was filed. Returns filed before the due date are treated as filed on the due date.

If they audit you and assess additional tax and you don't have the documentation to contest it, your choices are limited to pay up or go to jail.

Back a couple of decades ago one of my clients was called in for an audit of his business for several years. We had a major flood in the area and he called the accountant who was handling the audits for him. He asked the accountant what he should do because his records were in the office basement and it was flooding. The accountant's reply was "Are you sure that ALL the records are in the basement?"
It turned out that every financial record was "unavoidably destroyed" and the audits were abandoned.

I hope there really was money there. That was a major phishing scam last year.

If you think that's bad, you should look into what they do to people who get bit by the Alternative Minimum Tax.

an interesting thing I learned today:

If I loan a good friend $1,000 and charge him no interest, the IRS claims that I have to pay taxes on the income I would have received had I charged interest at the rate they set.

Actually, it has to be a loan of $10,000 or more before imputed interest applies.

Actually, it has to be a loan of $10,000 or more before imputed interest applies.

Makes sense, as anything under $10,000 can be claimed as a "gift" and thus not subject to taxation as I recall.

A no interest loan would certainly qualify under that criteria.