Discussion:Disagreement At Work? Hobby Income.

I recall reading something about this somewhere at one time but have no idea where. The only thing I can think of, off hand right now, is that her cost of goods sold should not have to be included in figuring how much Sally has to report on her tax return.

What do you think is the proper amount to report as income the 700 or 200 dollars.

of course, the yellow search box could always help someone find the correct answer Discussion:Hobby Income

Question then is, does she report 700 or 200 on line 21. I believe it is 200 dollars. But no one at work agreed.

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TexCPA 20:02, 20 October 2009 (CDT)

Micasa has been taking painting classes for years and wants to turn professional. But he is not ready to quit his day job. He buys 50 canvasses for $10 each and oil paints for $250. The oils are used up painting the 50 canvasses, making his per canvas cost is $15.

He decides to do summer art fairs to show off his works and sell them. He buys a display tent (a 5 year property) for $1500. He enters 10 different weekend shows that charge $100 entrance fee each. He is pleasantly surprised that he averages one sale per show. His total sales are $5000 for 10 canvasses. His mileage is 3,000 miles. (Assume a standard mileage rate of $0.50/mile)

His meal expenses are $840 and his lodging comes to $960.

Gross Revenue……$5000

…Initial Inventory……………$0

…Supplies & Materials ……$750

…Ending Inventory……… ($600)

…Cost of Goods Sold………$150

Income…………….$4850

Category I (Schedule A- Mortgage, RE Taxes…)

…none

Category 2 (Schedule A, 2% Misc)

…Entry fees ……….$1000

…Meals……..………..420

…Lodging…….……...960

…Mileage…………$1500

Category 3 (Schedule A, 2% Misc)

…Depreciation of Tent……$150

Net Income………………$820

Any critiques of my analysis?

I'd say yes. Since 263A excludes both hobby income and artists, this activity doubly exempted. The problem posed is sort of mute on UNICAP point, since the other expenses above are either related to direct costs or marketing and sales.

So let's bring the point home: the painter rented a studio for $1200 to paint his 50 canvasses.

A. Does he have to allocate on a per canvass basis of $24.

B. Or can he deduct the full amount?

C. Or can he choose which ever method works best for him?

In this case, is he better taking of increasing the cost basis of his canvasses to $39 ($15 direct + $24 indirect)? Which means he can deduct an additional $240 for the 10 canvasses sold.

If he deducts the full rental, he can only get $970 ($820 + $150 loss of tent depreciation).

I can relate Dan's example, or the 'I make jewelry' types more readily than someone who can see art. My late wife had a BFA in oil painting, and I don't think it was a hobby.

I had a client who did drawings and paintings of lockers for the police and fire personnel. Inside the locker was the uniform with proper badge number and the like. She rarely turned a profit, but his losses were minimal, less than $2,000 yet gross receipts were in the 20,000 range per year. She advertised in magazines, so tried to build business. My thought was that aside from the gross volume, this could be a hobby except for one matter. It was organized as a S Corp. Can a S Corp be a hobby?

But if one is doing it part-time, real life zaps one with priorities: job, family, community commitments... Those good intentions melt away. How many doctors and accountants have high-end cameras gathering dust in their closets.

In the case of Micasa, he has no BFA, just a desire. He'd not pass the expertise point. So he's looking to build a reputation to justify his 'expetise' as an artist.

Kevin, up north you can paint till the oils gel, then it's back to the studio, ooops, I mean the garage.

One man, a sculptor, used to spend a large percentage of his 30-40K salary on his avocation [his girlfriend basically supported him] and often gross next to nothing. He exhibited often, had great reviews, and was well known in both Philly and New York, but on setting up the date for the appointment, the agent launched himself into a 183 attack mode. "You'd better be able to prove this business can turn a profit" or words like that. Between the date of that call and the audit date, the client won a Pew Fellowship for 50K a year for two years! Case closed.

As I always note, google Stella Waitzkin today, then find her tax court case from 15+ years ago.

But I would have a very difficult time accepting a doctor or lawyer as a budding photographer, and I have little patience for those with sidelines like jewelry, knitting etc no matter their income.

Well in 2006 & 2007, he did not win any tournaments. Did not qualify for the really big ones. Sponsor did not pay bonuses or travel. He had a net loss of $15k-$20k in each year.

IRS decides to question those years as a business. I tried to explain that those were off years. Just look at 200/2003/2004/2005. And while we have not yet filed 2008, it will show a substantial profit in 2008 and again in 2009.

But he wanted to hear none of it. He started talking about opening prior years to move the business expenses to Schedule A....although in the good years that would have really benefited my client. Even mentions negligence & preparer penalties.

Well, in 2008 the guy won several competitions. Lots of cash, ATV's, truck, rods, reels, guns, etc. Sponsors paid for almost all travel and gave him bonuses. His total expenses were less than $2000. Net income was in excess of $100k. 2009 has been even better.

So, showed the agent the 2008 & YTD 2009 income statement and said...."you are absolutely correct...it is a hobby. Let's move the income (especially 2008 & 2009) to line 21, expenses to Sch A and no SE tax." Similar to your case, he changed his tune rather quickly.

The best thing about the Pew Grant is that it has been ruled non-taxable for SE tax, PA Income Tax & City of Philadelphia taxes! Line 21, but it was income from sculpting.