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Jeff_in_KC
03-26-2006, 10:09 PM
Question... been working on my taxes finally using "TaxCut". Got to the part about deductions and came across hobby expenses. Here's what it said about hobby expenses:

Enter the amount of any expenses you incurred in 2005 in the course of your not-for-profit activities, but only to the extent you reported income from those activities.


In counting "total expenses" for this purpose, you must include items such as interest that would be deductible in any event.

If you have expenses in excess of income from an activity, your tax benefit would be greater if you could deduct them. To deduct expenses in excess of income, you must prove that you had a profit motive in engaging in the activity.

You will be presumed to have the needed profit motive if the activity actually showed a profit in 3 of the past 5 years (including 2005). (If the activity consists of breeding, training, showing or racing of horses, the reference is 2 of the last 7 years.)

If you can show the needed profit motive, either using this presumption or otherwise, you should report all of your income and expenses for that activity on Schedule C, not here.

Given the fact I don't know squat about this area of taxes, can anyone help me with this? Can I deduct my expenses in buying all my start up equipment for BBQ contest last year, including entry fees and meats?

MrsMista
03-26-2006, 10:20 PM
What it's saying is that if you only made $500 at your hobby you can only claim $500 in expenses. However, if you want to do it as a schedule C then you can claim $500 in income and $5,000 in expense or what ever your numbers may be. Any you don't have to have an EIN number to do so.

To put your mind at ease I work for H&R Block during the tax season.

Jeff_in_KC
03-26-2006, 10:35 PM
LOL! Well, I made ZERO in income and had probably $3000 in expenses!

MrsMista
03-26-2006, 10:49 PM
Then business it is. IRS only expects you to turn a profit 2 out of 5 years for a small business. And even if you don't make money but your intention is to make money you can still declare it a business. Once you had your fun for a while walk away from it for a year and then revive it later when you need the tax break.

chad
03-27-2006, 08:23 AM
I'm fighting a similar battle!

The "team" only made about $215 or so, but I made some profit from the catering side (probably less than $1000) and have the capital expense of the cooker...I'm filing Schedule C because I need some protection from the IRAs that I closed to finance the startup.

I do have the EIN and my state tax number, so my "intention" is well covered and documented.

Should be interesting!!

Jeff_in_KC
03-27-2006, 08:39 AM
Dave, since I didn't cater, I'm kinda scared about making the claim even though it does say "hobbies". I dunno. Not sure I can document it. May just wait til next year and save everything this year, including the smoker.

Smoker
03-27-2006, 08:40 AM
MrsMista,

Can Jeff claim all his BBQ expenses including the new smoker as a startup business and include all the competitions as "advertising" since he gives away his business cards and free samples? (You DO do that Jeff)I ask this cause thats my plan for next year.

Jeff_in_KC
03-27-2006, 09:08 AM
Even though I have no permit from the health department to cater? I don't suppose the IRS is gonna go check with them.

The_Kapn
03-27-2006, 09:24 AM
The IRS has lots of info on-line about hobby vs business income and expenses. Here is just one sample quote:

"In determining whether you are carrying on an activity for profit, all the facts are taken into account. No one factor alone is decisive. Among the factors to consider are whether:

You carry on the activity in a business-like manner,
The time and effort you put into the activity indicate you intend to make it profitable,
You depend on income from the activity for your livelihood,
Your losses are due to circumstances beyond your control (or are normal in the start-up phase of your type of business),
You change your methods of operation in an attempt to improve profitability,
You, or your advisors, have the knowledge needed to carry on the activity as a successful business,
You were successful in making a profit in similar activities in the past,
The activity makes a profit in some years and the amount of profit it makes, and
You can expect to make a future profit from the appreciation of the assets used in the activity. "It is from:
http://www.irs.gov/businesses/small/article/0,,id=99239,00.html

Explore all the info available and decide the level of "adventure" you are comfortable with.

FWIW.

TIM

Jeff_in_KC
03-27-2006, 12:25 PM
Thanks Tim... #3 and #7 are stretching it. #9 MAYBE also.

The IRS has lots of info on-line about hobby vs business income and expenses. Here is just one sample quote:

"In determining whether you are carrying on an activity for profit, all the facts are taken into account. No one factor alone is decisive. Among the factors to consider are whether:

You carry on the activity in a business-like manner,
The time and effort you put into the activity indicate you intend to make it profitable,
You depend on income from the activity for your livelihood,
Your losses are due to circumstances beyond your control (or are normal in the start-up phase of your type of business),
You change your methods of operation in an attempt to improve profitability,
You, or your advisors, have the knowledge needed to carry on the activity as a successful business,
You were successful in making a profit in similar activities in the past,
The activity makes a profit in some years and the amount of profit it makes, and
You can expect to make a future profit from the appreciation of the assets used in the activity. "It is from:
http://www.irs.gov/businesses/small/article/0,,id=99239,00.html

Explore all the info available and decide the level of "adventure" you are comfortable with.

FWIW.

TIM

kickassbbq
03-27-2006, 12:47 PM
I thought you had to be an actual business (incorporated, tax ID, etc) before you could deduct anything. Heh, if I can have a tax deduction from a HOBBY, I should be able to deducy my alcohol consumption from last year, about $4,000.00.

MrsMista
03-28-2006, 12:10 AM
MrsMista,

Can Jeff claim all his BBQ expenses including the new smoker as a startup business and include all the competitions as "advertising" since he gives away his business cards and free samples? (You DO do that Jeff)I ask this cause thats my plan for next year.

All of that is true and then some. EIN are not a requirement for filing especially for sole proprietorships. I claimed Neil's experiments as a loss for his catering (no ein) business because he's working on his recipes for competitions and catering jobs.

kickassbbq
03-28-2006, 06:08 AM
So, what you all are saying is I can deduct my new truck that I use to pull my new smoker and all the comp equip (about 40,000.00) from income taxes?
It's an IRS Party.
Smoke On!!!!!
ed

MrsMista
03-28-2006, 03:22 PM
So, what you all are saying is I can deduct my new truck that I use to pull my new smoker and all the comp equip (about 40,000.00) from income taxes?
It's an IRS Party.
Smoke On!!!!!
ed

You can deduct a percentage (percent used for business) of the cost (insurance, gas, monthly payments) or standard mileage for the exact amount of business miles.

Jorge
03-28-2006, 04:39 PM
Best free advice I ever got was from my Grandpa. "Son, don't ever piss off God or the IRS. They remember everything and hold all the high cards." If I have a deduction I can back up I take it. If it's a grey area I'll pay my share and save the cash and hassle of an audit. I was audited once anyway, luck of the draw, and it was a royal pain in the butt. Spending an hour with a GOOD CPA now is cheeper than some of the possible consequences later:grin: If nothing else it should produce a gameplan for the future to maximize deductions.

MrsMista
03-28-2006, 04:48 PM
Best free advice I ever got was from my Grandpa. "Son, don't ever piss off God or the IRS. They remember everything and hold all the high cards." If I have a deduction I can back up I take it. If it's a grey area I'll pay my share and save the cash and hassle of an audit. I was audited once anyway, luck of the draw, and it was a royal pain in the butt. Spending an hour with a GOOD CPA now is cheeper than some of the possible consequences later:grin: If nothing else it should produce a gameplan for the future to maximize deductions.

Yes the IRS have target returns they flag but they are getting to the point of picking on legitimate returns. We have many clients come in wondering why they have to fill out head of household forms for their own children that they've claimed since birth.

One client received a bill saying they owed $6,000 based on their estimate of the person schedule C from the previous year. The person only claimed $600 in 1099 earnings.

Another thing I found out is that tax returns are down. Working for H&R Block they wanted to find out why are numbers aren't meeting (exceeding) last years numbers. Based on information from the IRS not enough people are filing their taxes this year. This leaves them time to scrutinize the returns that have already been filed legitimate or not.

JohnMcD348
03-28-2006, 07:11 PM
OK, well, I'm a simple man with simple ideas. So here's my question that needs clarification. If I go out and buy a bunch of stuff this year in preperation to enter a cookoff next year, would the expenses be tax deductible under the "Hobby" instructions? I have no need, will, whim, or desire to make money. So would that qaulify as a hobby or just a money pit?

Jeff_in_KC
03-28-2006, 07:16 PM
John, even if you don't have any delusions of making money at it, I'd claim the deductions you're allowed and if anyone asks, damned straight you want to make money! If anyone here asks, I'll tell you I am competing for the fun and enjoying friends. If the IRS asks, I'm balls to the wall trying to win money and drum up business for catering gigs!

The_Kapn
03-28-2006, 07:20 PM
OK, well, I'm a simple man with simple ideas. So here's my question that needs clarification. If I go out and buy a bunch of stuff this year in preperation to enter a cookoff next year, would the expenses be tax deductible under the "Hobby" instructions? I have no need, will, whim, or desire to make money. So would that qaulify as a hobby or just a money pit?

John--let me clarify the above comments :lol:
Hobby income is taxable. Sorry, but it is.
Hobby expenses are deductable only to the extent of Hobby income.
So, if you win $500 and have expenses of $5000--you can "deduct" only $500 and the taxable balance becomes ZERO, as it should be.
You simply eat the other $4500--it is a Hobby--right?
Hobby = Money Pit :lol:

You can not "write off" or "offset" other income with Hobby expenses.
Sorry.

TIM

The_Kapn
03-28-2006, 07:24 PM
John, even if you don't have any delusions of making money at it, I'd claim the deductions you're allowed and if anyone asks, damned straight you want to make money! If anyone here asks, I'll tell you I am competing for the fun and enjoying friends. If the IRS asks, I'm balls to the wall trying to win money and drum up business for catering gigs!

Jeff--I hate to be a spoil sport here, but:
This forum is a searchable public record that does not go away.

Consider that "for what it is worth" and where it would place you in a "discussion" with the Feds.

TIM

ciret
03-28-2006, 07:30 PM
Ya gots ta be careful with those IRS guys. I had a friend that restored cars fro a hobby. He would deduct his expenses against his modest earnings, like BBQ contests, doing small amounts of work for mostly friends. He got a little too sucsessful and the Feds said it was a business and he spent a huge amount of time getting it all figured out.

Jeff_in_KC
03-28-2006, 07:39 PM
LOL! Good point, Tim! So if I'm understanding this hobby deduction correctly, since I spent around $3000 to get started last year and won a total of ZERO in prize money, I cannot deduct any of the $3000 I spent to start up? And this year, I can't deduct anything for the smoker on my 2006 taxes unless I win money this year? BUT if I cater ALSO, I CAN deduct the expenses from '05 even though I didn't get a catering gig last year because it was my INTENT to get a catering job. Do I have all that right?

This all sucks! I wish we'd do away with income tax one day!

The_Kapn
03-28-2006, 08:36 PM
This topic is too serious to be fully discussed here, or in any forum that I know of.

Any one who is considering deducting business expenses needs to sit down with a certified and competent tax professional IN PERSON, lay out the documents you have, and come up with a valid and legal tax plan.
You may only need to do this at startup if the situation is simple and then follow their advice in future years.
But, the price for screwing up is too big to trust to Internet advice.
JMHO.

With that said--I spent four years in "enforcement" as a Social Security Field Rep and worked "way to close" with the IRS. My specialty in that was "Self Employment" and "Employee-Employer Relationships" as I worked with them.
For many years after, I had small businesses of my own--small time and side-line businesses. Some years I made a buck or more, many years I lost my ass and offset other income. I even ran my salt-water boat as a charter boat for 3 years. Lost $45K in 3 years--100% legal, legitimate, and well documented. Had to pay capital gains on the boat when I sold out because it was depreciated in the prior 3 years! That hurt, but it was the correct thing to do.

Now--this is my message here.
IF you are running a BBQ team with a reasonable expectation of a profit--it is a business.
Have a plan. Establish a "business presence" through business cards, flyers, DBA registration, advertising, certifications, or any method used by businesses to grow.
Keep detailed records. Learn the rules from the experts in person--not on line. Document, Document, Document.

If you are running a team to have fun--it is a freakin' hobby. There is nothing wrong with that!
Treat it as such. Keep expense records adequate to offset any winnings. You should not pay taxes for hobby income!

Bottom line, in my humble opinion, is "Tread lightly when messing with the IRS"--it is just not worth it!

As a parting thought--the IRS just "focused" on "street vendors". I had a chance to see the training given agents in to how to "reconstruct" underreported income.
If they ever decide to "focus" on BBQ teams--it is gonna be "interesting"--to say the least :lol:

Just decide what your tolerance for "adventure" is.

TIM

Jeff_in_KC
03-28-2006, 08:58 PM
Now--this is my message here.
IF you are running a BBQ team with a reasonable expectation of a profit--it is a business.
Have a plan. Establish a "business presence" through business cards, flyers, DBA registration, advertising, certifications, or any method used by businesses to grow.
Keep detailed records. Learn the rules from the experts in person--not on line. Document, Document, Document.

If you are running a team to have fun--it is a freakin' hobby. There is nothing wrong with that!
Treat it as such. Keep expense records adequate to offset any winnings. You should not pay taxes for hobby income!


That's about as straight forward as I've seen it, Tim. Think I'll pass this year (2005 taxes) and document ALL THINGS for 2006 tax season.

BTW... in your or MrsMista's experiences, is there any less liklihood of being audited if you wait til the last minute to send in your return when there is a mass of paper coming in? I ask this because the mention above of more audits when there are fewer returns.

jgh1204
03-28-2006, 09:41 PM
Jeff, the other thing you have to think about, is can you carry forward your losses/expenses into 2006?

Jeff_in_KC
03-28-2006, 09:45 PM
Jeff, the other thing you have to think about, is can you carry forward your losses/expenses into 2006?

AARRRGHHH!!! Head exploding mod! :eek: I'm getting tired of thinking about taxes and everything there is to consider. My wife thinks I need to get 'em done ASAP but all I can think about is Osage City, KS in two weeks dad gum it! :roll:

jgh1204
03-28-2006, 09:58 PM
Just file an extension and then have your head explode August 15th.

MrsMista
03-28-2006, 11:33 PM
AARRRGHHH!!! Head exploding mod! :eek: I'm getting tired of thinking about taxes and everything there is to consider. My wife thinks I need to get 'em done ASAP but all I can think about is Osage City, KS in two weeks dad gum it! :roll:

Jeff, take Kapn advice and take it to a professional. Let them have the stress of find the best tax solution for you. We have clients that drop off stacks of receipts and willing to pay for us to calculate every possible deduction we can find.

racer_81
03-29-2006, 06:59 AM
Seems like life would be simpler if we canned the income tax and went to a national sales tax - as long as that national sales tax is Clearly Shown on every receipt so we are reminded how much it is.

Jeff_in_KC
03-29-2006, 07:54 AM
Seems like life would be simpler if we canned the income tax and went to a national sales tax - as long as that national sales tax is Clearly Shown on every receipt so we are reminded how much it is.

Amen, Racer.