Selling records and the new tax law

[unknown pleasures]

1 hour ago, chiefwahoo said:

That's the rub...you're not allowed to take any expenses for a hobby. And virtually nobody posting here is going to qualify under IRS regulations as a legit business as opposed to hobby loss/income criteria. We are stuck putting the whole damn amount as income and paying the taxes on it.  As someone mentioned, that's always been the rule anyway, we're now just being held accountable. Same thing with internet purchases. Before it was automatically taxes, who out there admitted on their state tax returns that they had made untaxed internet purchases and then ponied up the state tax due? Same concept.

 

 

 

This is a super important fact that I'm surprised no one else has brought up - there are two ways to report this income: as either hobby expenses or business expenses.

If it's hobby expenses it's super simple: you just add the 1099 to your Schedule A and you're done. It's income, you're not allowed to write anything off and that's that.

If it's business income, it goes on Schedule C and that's when you can start writing off cost of goods, fees, mailing supplies etc.

BUT if you ever get audited, the IRS is going to want proof that this is a legitimate, for-profit business and not just a "hobby" where you're selling off some extra records on eBay. If push came to shove, I think a lot of the casual sellers on VC would have trouble justifying their write-offs if online sales aren't their day job.

[stl_ben]

Businesses can be any size, it doesn't have to be your full time job.  As long as you are accurately keeping track of expenses it is easy to properly file this way, I've been doing it for years.

[blueeyesgetboring]

9 minutes ago, stl_ben said:

Businesses can be any size, it doesn't have to be your full time job.  As long as you are accurately keeping track of expenses it is easy to properly file this way, I've been doing it for years.

Exactly, and there is the option of taking the standard deduction which doesn’t require one to list out expenses. But obviously if your expenses are higher than the standard deduction it’s better to itemize everything out so you can get full credit for all expenses. 

[MyEnemy]

I’m a full fucking idiot and all of this confuses the shit out of me.

[chiefwahoo]

1 hour ago, stl_ben said:

Businesses can be any size, it doesn't have to be your full time job.  As long as you are accurately keeping track of expenses it is easy to properly file this way, I've been doing it for years.

Yes, businesses can be any size but the vast majority of people here will not qualify as a business per IRS rules. Maybe you're an exception. You can't have a full blown record collection and then file a Schedule C for the ten records you sell per year. But the IRS is so screwed up right now that nobody is getting audited anyway. If you're going to file a Schedule C that ultimately shows income, you're probably at a low risk. They have no manpower for major businesses much less small fry shit. But coincidentally starting your Schedule C business  the same year as new 1099 rules is obviously a red flag. Most of us just have to take our lumps.

 

 

[N8TRU]

15 minutes ago, chiefwahoo said:

But the IRS is so screwed up right now that nobody is getting audited anyway. If you're going to file a Schedule C that ultimately shows income, you're probably at a low risk. They have no manpower for major businesses much less small fry shit. 

While I agree the IRS is screwed up this couldn't be further from the truth. I come from a farming family with less than 5 people having names on "payroll" if we wanna call it that. We've been audited by the IRS who can't get things straight over less than $1,000. The IRS won't leave it alone even though our accountant has been handling the issue for months to explain it to them and our accountant is very good. They have bigger fish to fry but clearly enjoy attacking the little guy too. I have a friend who is a local insurance agent and he said he's been hearing plenty of similar stories.

[chiefwahoo]

5 minutes ago, N8TRU said:

While I agree the IRS is screwed up this couldn't be further from the truth. I come from a farming family with less than 5 people having names on "payroll" if we wanna call it that. We've been audited by the IRS who can't get things straight over less than $1,000. The IRS won't leave it alone even though our accountant has been handling the issue for months to explain it to them and our accountant is very good. They have bigger fish to fry but clearly enjoy attacking the little guy too. I have a friend who is a local insurance agent and he said he's been hearing plenty of similar stories.

I see how that comes off as hyperbolic. What I meant was that nobody (so to speak) on the boards is going to get specifically audited over the way they report their miniscule 1099 income, be it Schedule C or not. Not reporting it at all is a different story. And yes, there are always random audits but again, taking into account the cross-section here, the risk is minute. Once they get their hooks into you is a different story and can go a variety of ways based on your agent.

 

[unknown pleasures]

2 hours ago, chiefwahoo said:

Yes, businesses can be any size but the vast majority of people here will not qualify as a business per IRS rules. Maybe you're an exception. You can't have a full blown record collection and then file a Schedule C for the ten records you sell per year. But the IRS is so screwed up right now that nobody is getting audited anyway. If you're going to file a Schedule C that ultimately shows income, you're probably at a low risk. They have no manpower for major businesses much less small fry shit. But coincidentally starting your Schedule C business  the same year as new 1099 rules is obviously a red flag. Most of us just have to take our lumps.

 

 

This guy gets it. 
 

And this is directly from the IRS’s own guide to determining if you’re a business versus a hobby:

 

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?

 

Edited January 27, 2022 by unknown pleasures

[stl_ben]

Its always best to contact a tax professional and take all internet advice with a grain of salt.  If you get audited siting some guy on a VC isn't going to hold up in court.

[unknown pleasures]

16 minutes ago, stl_ben said:

Its always best to contact a tax professional and take all internet advice with a grain of salt.  If you get audited siting some guy on a VC isn't going to hold up in court.

This is my whole point. Nearly every post you’ve made in this thread has been about how easy it is to write things off and I’m trying to warn people it isn’t so simple. 

[Derek™]

So, jabbing aside, I think anyone who's been on VC for a while is probably aware that stl_ben sells more than most users on the forum.  So I'm inclined to believe that he seems to know his stuff, sure, but like you guys said... taxes may universally fuck us all in the butt, yes, but it's not a one-size-fucks-all.  Working with a personal tax accountant is definitely the right move to make, especially if there are any uncertainties.

Edited January 30, 2022 by Derek™

[BuzzersonKillwell]

The thing that feels missing from all of this talk is the cost / benefit ratio. Ben almost certainly flips enough that a Schedule C makes sense and is worth the hassle of tracking expenses and itemizing deductions. 
 

For the vast majority of folks it probably won’t be worth it. Just report the 1099 as income. If you make $3,000 selling records this year you owe like $150 bucks, or more likely, you’ll have $150 less in your refund. 
 

[ntslash]

Here is a simple test: if you are selling to make a profit, report as business income. If you are selling to clear shelf space for more new records, report as personal income. 

 

If you wait in line for 6 hours at RSD and buy 25 titles to flip for a 50% profit, you can make a clear business case.

 

If you sold a copy of Rumors that you listened to 75 times over the years for $20 so you could buy something else for your collection, then that's not business income and you probably shouldn't write off the $8 you spent on the record. 

 

 

[Derek™]

What if you're like the majority of normal people and periodically – but not consistently – sell records to make shelf space, and since you used to be into VC hype-core, your sale items fetch way more than you paid for them, so it'd be dumb to sell them for $20?

[copelandkid]

sounds like a few more knowledgeable folks have weighed in here recently, can anyone clarify whether hobby income is the total amount made selling off excess hobby items (i.e. extra records to free up shelf space) or that amount minus the amount *spent* on the hobby (i.e. probably a net loss and therefore not taxable income)? 

[ntslash]

5 minutes ago, copelandkid said:

sounds like a few more knowledgeable folks have weighed in here recently, can anyone clarify whether hobby income is the total amount made selling off excess hobby items (i.e. extra records to free up shelf space) or that amount minus the amount *spent* on the hobby (i.e. probably a net loss and therefore not taxable income)? 

Simple answer: You can't deduct expenses associated with your hobby. But you don't have to pay self-employment tax on the income, so that's a plus. 

[ntslash]

8 minutes ago, Derek™ said:

What if you're like the majority of normal people and periodically – but not consistently – sell records to make shelf space, and since you used to be into VC hype-core, your sale items fetch way more than you paid for them, so it'd be dumb to sell them for $20?

That's a great question and one that's probably open to interpretation. My answer would be: what's your primary motivation for most of your sales? If it's profit, then it's business income. If it isn't for profit, then it's not business income. 

[Derek™]

1 minute ago, ntslash said:

That's a great question and one that's probably open to interpretation. My answer would be: what's your primary motivation for most of your sales? If it's profit, then it's business income. If it isn't for profit, then it's not business income. 

I'm not trying to give you shit specifically but this is starting to split so many hairs and get silly.  Do I need to add a new column to my Sales spreadsheet for Intent of Sale, and maybe a little pie-chart that shows whether or not my overall sales for the year fall under business or not?

[ntslash]

11 minutes ago, Derek™ said:

I'm not trying to give you shit specifically but this is starting to split so many hairs and get silly.  Do I need to add a new column to my Sales spreadsheet for Intent of Sale, and maybe a little pie-chart that shows whether or not my overall sales for the year fall under business or not?

I don't know. Just change your handle to Derek's Record Shop and call it all business income! 

[Derek™]

1 minute ago, ntslash said:

I don't know. Just change your handle to Derek's Record Shop and call it all business income! 

D Recs™.

[MrScorpio]

54 minutes ago, Derek™ said:

I'm not trying to give you shit specifically but this is starting to split so many hairs and get silly.  Do I need to add a new column to my Sales spreadsheet for Intent of Sale, and maybe a little pie-chart that shows whether or not my overall sales for the year fall under business or not?

No. You make a spreadsheet to keep track of your purchases and the day you purchased them, then you can consult your PP/CC history when the time comes that you sell the record. Or stick a receipt with the record. It's not as complicated as everyone makes it out to be.

 

Bottom line is you find a way to track how much you paid, or you pay taxes on it. Up to you how you want to go about it. All the tax man needs is a total amount. How much you get to write-off in addition to item cost (gas mileage, meals, travel expenses, etc...) depends on if you file as a business or not. If not filing as a business, *I believe* the max you can deduct is the taxes, fees, and item cost.

 

I'm not a financial advisor or tax expert and this is not financial advice.  Nor do I know 100% about the write-off discrepency, but from my understanding and prior experience, I believe that would be the case.

 

Ps... I find that doing a search in your email account can help find many receipts for items purchased years ago.

 

I may come across as a jerk but hopefully I have useful info from time to time. 😆

[faaip de oiad]

[chiefwahoo]

I've been a CPA for 20+ years for what it's worth and it's the only reason I am even chiming in as I don't post much. I don't really think there is even any real dispute amongst members here, just a lot of confusion, understandably.  It boils down to two options. Slap the gross amount of your 1099 figure on page 1 and forget about related expenses...or roll the dice and call yourself a business and prepare a Schedule C even though there is about a zero chance it would hold up under audit.

 

Again, this is letter of the law stuff. The odds anyone gets audited over it is even more unlikely than your hobby being approved as a business. I know of many people that file rather egregious Schedule C  figures for their legit businesses year over year without consequence. I once had to do one for myself that was correct but looked absolutely insane and had no issue. It's just not their focus. But also not worth the risk for a variety of reasons.

 

 

[MrScorpio]

I ran a hobby/business for about 5 years and all was guided by my CPA. Not sure your definition of "egregious" or "approved" but my business was rather small. I was informed to carry on and when it grows my CPA would discuss options with me at that time. Nothing to panic about. I doubt anyone on here is pulling 50k+ off of a vinyl hobby, and if so, they likely are already handling taxes on it.

 

Bottom line is: talk to your local tax guy regarding your own unique personal situation. It's worth the time and consult. Don't go off of the word of strangers.  Just my financial opinion, not advice.

[stl_ben]

I know of several people on here that are considerably over that $50k mark, but yeah anyone that is over $20k has probably been doing taxes for awhile as that was the previous point paypal was sending out 1099s.