Saturday, July 25, 2009

Just a little information

the real kind, you know that isn't made up in a frenzy of malice and spite. You do NOT always need an IRS Tax Number, here is the exception, which sadly, most of us fit in. Tax numbers are great for resale/wholesale and if you do craft shows, but even most craft shows will give you a temporary tax number.

State to state varies, check you state's local gov site. It doesn't hurt to register your business through your state in case you'd like to expand in the future. In my case I file with VA every year even though I have yet to clear a profit.

From Barbara Brabec's Hand made for Profit you know, someone who really knows what they are talking about.

Are You “in Business” or Not?

Q: A reader asks, “At this time I do not foresee having enough income to allow me to deduct any business expenses. Are there advantages to being a registered business that I’m missing out on by maintaining a hobbyist status?

The two main disadvantages of treating your activity as a hobby instead of a business are that (1) your profit margin on finished crafts will be less because you cannot buy supplies and materials at wholesale prices; and (2) you cannot give your hobby business a business name unless you register it with local authorities. (See article, “Business Name Registration.”)

There is nothing wrong with selling to support an art or craft hobby, but if you decide you want to work at home only as a hobby, you are still required to report your hobby income on Schedule C of Form 1040, and list all the expenses you incurred to earn this income. If you end up with a profit, you’ll have to pay taxes on it. If you end up with a loss, however, you are not entitled to a deduction, but you can deduct expenses up to the amount of your hobby income.

Hobby Income

Q: How does the IRS treat hobby income, and at what point does a “hobby business” become a “real business” in the eyes of IRS?

A “hobby business” becomes a “real business” in the eyes of IRS at the point where you can state that you (1) are trying to make a profit, (2) are making regular business transactions, and (3) have made a profit at least three years out of five. There have been exceptions to the last rule. In the end, the most important factors are the amount of time you devote to your activity, plus the way you present yourself to the public as being engaged in the sale of products or services; also the way you keep record of your business. (See “How to keep the IRS happy with your bookkeeping system.”)

NOTE: If you do not meet IRS criteria, your business will be ruled a “hobby” and any loss you may have deducted against other income will be disallowed. (You can show a loss only on a business, not a hobby.)

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