Jim or moderators, if this isn't an appropriate question, please definitely feel free to delete it immediately. Thanks.
I'm still learning, and I completely understand that. But I have done some research and can't seem to find out what makes selling digital images, prints, etc., a business per the IRS, thereby allowing for business deductions. I thought maybe some of you would know.
A couple of important things are that I'm already self-employed with another business and have been for about 10 years, and I'm comfortable with IRS regulations about self-employment in my current business. I do go by the book regarding the IRS, so I'm not looking to put one over on them. I just don't know whether if you sell one image it's a business, that kind of thing.
Again, I've researched, including on the IRS small business site, but haven't found this answer. It may very well be there, and if anyone has a link to the answer to this question that would be great. Otherwise, has anyone else ever had to find this out? Maybe you have an accountant or something (I don't) and maybe that's how you found out what made photography a business for you according to the IRS.
Anyway, if this is not an inappropriate question I'd appreciate any insight. Thank you so much!
Posted by Jim Bullard on December 6, 2010 at 7:54 AM
I'm registered to collect sales taxes (NY) so I just assumed that I am a business for IRS purposes and file appropriately. They haven't argued the point so far. My take, if you are selling your photos and/or service as a photographer, you are in business.
This is where it would really pay to buy at least a little time from a CPA, especially one from your state. You don't have to buy their services in management or tax prep, but an hour of their time will really serve you well. Their experience, study of the tax laws, and familiarity with laws in your own state as well as the federal laws are frankly worth more than opinions you get here. You'll be surprised what is and is not deductible, for example. Even if you're only selling a little, the cash flow from photography will show up if your other business leads to an audit, for example. We're straight shooters on taxes and play by the book, too.
You have to show intent to be a business. Advertising, participation in selling events, a website, ect. If the business fails to make money the IRS can ask you to turn it into a hobby business or dissolve it. Let's say you were approaching retirement and felt photography would make a good retirement business to me as long as you can show a proper business setup including book keeping, a separate bank account and activities consistent with trying to generate a profit it will pass the test. Before I went into a small business I knew would loose money at first I spoke with someone at the IRS. This person indicated if you were audited you better have a business plan and books that indicate you are running a business. The IRS has to walk away feeling you were in the business to generate a profit!!
Excellent Michael! We've got substantial cash flow through our photo business and a 20+ year history so there's no question of intent. But just starting out, it's a lot harder to demonstrate, much less to track.
Your other business (and tax) experience will stand you in good stead over the long haul Barbara, but as Michael points out, the intent is harder to demonstrate while cash flow is small and expenses are large.
Posted by Bill Brennan on December 6, 2010 at 4:37 PM
Barbara, go to irs.gov and with a little bit of searching you will locate an article "Is your hobby a for-profit business". There are a series of questions to help you make the determination of Hobby vs Business.
There are rules for reporting income and expense for the Hobby that are different from the rules for the Business reporting.
I believe that you can make the decision. Then document your decision process for your tax file; so that in the rare event that you are questioned, you can show that your intent was valid and reasonable.
Thank you all so much! And, Bill, that article sounds like exactly what I need. I didn't even think to search for the term "hobby." Thank you all again!
Business or Hobby? Answer Has Implications for Deductions
FS-2007-18, April 2007
The Internal Revenue Service reminds taxpayers to follow appropriate guidelines when determining whether an activity is a business or a hobby, an activity not engaged in for profit.
In order to educate taxpayers regarding their filing obligations, this fact sheet, the eleventh in a series, explains the rules for determining if an activity qualifies as a business and what limitations apply if the activity is not a business. Incorrect deduction of hobby expenses account for a portion of the overstated adjustments, deductions, exemptions and credits that add up to $30 billion per year in unpaid taxes, according to IRS estimates.
In general, taxpayers may deduct ordinary and necessary expenses for conducting a trade or business. An ordinary expense is an expense that is common and accepted in the taxpayer’s trade or business. A necessary expense is one that is appropriate for the business. Generally, an activity qualifies as a business if it is carried on with the reasonable expectation of earning a profit.
In order to make this determination, taxpayers should consider the following factors:
Does the time and effort put into the activity indicate an intention to make a profit?
Does the taxpayer depend on income from the activity?
If there are losses, are they due to circumstances beyond the taxpayer’s control or did they occur in the start-up phase of the business?
Has the taxpayer changed methods of operation to improve profitability?
Does the taxpayer or his/her advisors have the knowledge needed to carry on the activity as a successful business?
Has the taxpayer made a profit in similar activities in the past?
Does the activity make a profit in some years?
Can the taxpayer expect to make a profit in the future from the appreciation of assets used in the activity?
The IRS presumes that an activity is carried on for profit if it makes a profit during at least three of the last five tax years, including the current year — at least two of the last seven years for activities that consist primarily of breeding, showing, training or racing horses.
If an activity is not for profit, losses from that activity may not be used to offset other income. An activity produces a loss when related expenses exceed income. The limit on not-for-profit losses applies to individuals, partnerships, estates, trusts, and S corporations. It does not apply to corporations other than S corporations.
Deductions for hobby activities are claimed as itemized deductions on Schedule A (Form 1040). These deductions must be taken in the following order and only to the extent stated in each of three categories:
Deductions that a taxpayer may take for personal as well as business activities, such as home mortgage interest and taxes, may be taken in full.
Deductions that don’t result in an adjustment to basis, such as advertising, insurance premiums and wages, may be taken next, to the extent gross income for the activity is more than the deductions from the first category.
Business deductions that reduce the basis of property, such as depreciation and amortization, are taken last, but only to the extent gross income for the activity is more than the deductions taken in the first two categories.
Link:
Further information is available in IRS Publication 535, Business Expenses
Here's the "practical side" of distinguishing between hobbies and businesses, as conveyed to us by our CPA. In his words, hobbies inappropriately claimed as businesses are "alarm buttons" for the IRS.
He holds us to a pretty high standard in our proposals to him as we're contemplating new small business ventures. He asks the uncomfortable questions up front, rather than waiting for them to come from the IRS!!!!
Discussion
9 repliesI'm still learning, and I completely understand that. But I have done some research and can't seem to find out what makes selling digital images, prints, etc., a business per the IRS, thereby allowing for business deductions. I thought maybe some of you would know.
A couple of important things are that I'm already self-employed with another business and have been for about 10 years, and I'm comfortable with IRS regulations about self-employment in my current business. I do go by the book regarding the IRS, so I'm not looking to put one over on them. I just don't know whether if you sell one image it's a business, that kind of thing.
Again, I've researched, including on the IRS small business site, but haven't found this answer. It may very well be there, and if anyone has a link to the answer to this question that would be great. Otherwise, has anyone else ever had to find this out? Maybe you have an accountant or something (I don't) and maybe that's how you found out what made photography a business for you according to the IRS.
Anyway, if this is not an inappropriate question I'd appreciate any insight. Thank you so much!
Your other business (and tax) experience will stand you in good stead over the long haul Barbara, but as Michael points out, the intent is harder to demonstrate while cash flow is small and expenses are large.
There are rules for reporting income and expense for the Hobby that are different from the rules for the Business reporting.
I believe that you can make the decision. Then document your decision process for your tax file; so that in the rare event that you are questioned, you can show that your intent was valid and reasonable.
Bill Brennan
http://www.irs.gov/newsroom/article/0,,id=169490,00.html
Mike
Business or Hobby? Answer Has Implications for Deductions
FS-2007-18, April 2007
The Internal Revenue Service reminds taxpayers to follow appropriate guidelines when determining whether an activity is a business or a hobby, an activity not engaged in for profit.
In order to educate taxpayers regarding their filing obligations, this fact sheet, the eleventh in a series, explains the rules for determining if an activity qualifies as a business and what limitations apply if the activity is not a business. Incorrect deduction of hobby expenses account for a portion of the overstated adjustments, deductions, exemptions and credits that add up to $30 billion per year in unpaid taxes, according to IRS estimates.
In general, taxpayers may deduct ordinary and necessary expenses for conducting a trade or business. An ordinary expense is an expense that is common and accepted in the taxpayer’s trade or business. A necessary expense is one that is appropriate for the business. Generally, an activity qualifies as a business if it is carried on with the reasonable expectation of earning a profit.
In order to make this determination, taxpayers should consider the following factors:
Does the time and effort put into the activity indicate an intention to make a profit?
Does the taxpayer depend on income from the activity?
If there are losses, are they due to circumstances beyond the taxpayer’s control or did they occur in the start-up phase of the business?
Has the taxpayer changed methods of operation to improve profitability?
Does the taxpayer or his/her advisors have the knowledge needed to carry on the activity as a successful business?
Has the taxpayer made a profit in similar activities in the past?
Does the activity make a profit in some years?
Can the taxpayer expect to make a profit in the future from the appreciation of assets used in the activity?
The IRS presumes that an activity is carried on for profit if it makes a profit during at least three of the last five tax years, including the current year — at least two of the last seven years for activities that consist primarily of breeding, showing, training or racing horses.
If an activity is not for profit, losses from that activity may not be used to offset other income. An activity produces a loss when related expenses exceed income. The limit on not-for-profit losses applies to individuals, partnerships, estates, trusts, and S corporations. It does not apply to corporations other than S corporations.
Deductions for hobby activities are claimed as itemized deductions on Schedule A (Form 1040). These deductions must be taken in the following order and only to the extent stated in each of three categories:
Deductions that a taxpayer may take for personal as well as business activities, such as home mortgage interest and taxes, may be taken in full.
Deductions that don’t result in an adjustment to basis, such as advertising, insurance premiums and wages, may be taken next, to the extent gross income for the activity is more than the deductions from the first category.
Business deductions that reduce the basis of property, such as depreciation and amortization, are taken last, but only to the extent gross income for the activity is more than the deductions taken in the first two categories.
Link:
Further information is available in IRS Publication 535, Business Expenses
He holds us to a pretty high standard in our proposals to him as we're contemplating new small business ventures. He asks the uncomfortable questions up front, rather than waiting for them to come from the IRS!!!!