Tax Time Questions

[pcooley]

When I was a single college student, I filled out the form 1040-EZ, and that was that. After I got married, I started using Turbo Tax.

At some point I started working for myself being a computer assistant for an elderly author. I wasn't sure where to report that money or even if I had to report the money, and, low and behold, looking into it, I discovered I was a business. My being a computer assistant also included some writing income, and then it morphed into being a beekeeper with some writing income.

Now I'm back to working and getting a W2 form and being a beekeeper.

I still use Turbo Tax, but I'm still confused about being a business. I only make about $700 a year beekeeping now because my other work keeps me busy. My beekeeping has always been a mostly cash business, and I am aware that many people who run a cash business don't report it, but I always do.

Anyway, here's my question. You always hear about people who have boxes of receipts. I never have any receipts, and I never claim any deductions. Our standard deduction always outstripped any itemizing of deductions I've tried to do with Turbo Tax, even when our mortgage interest was at its height.

I could claim the cost of my jars as a beekeeping expense, but that's never more than $100 a year. It doesn't seem worth the hassle of trying to figure out the intricacies of being a business. I would like to revert to hobby status, but I don't know if I can. I make a profit, however modest, every year. I also have to continue to have a city business license and pay my state tax in order to sell at the Farmer's Market. Can I be a business at the state level and a hobby at the federal? It's so confusing that I think I should hire an accountant, but I only make $700 a year in a good year, so I don't think I can justify hiring an accountant. I don't think I'm a business. I'm just a guy who sells honey. It feels silly when I'm trying to figure out how much honey I pulled for personal use, etc.

Other than that, we just have our W-2 forms. Should we have a shoe box full of receipts? What are these shoe boxes full of receipts I always here about. It's a mystery to me. I've always just dealt with my W-2 forms and that's that.

[CeciliaW]

Schedule C - small business

Total your income

Total your expenses, including jars, license fees, business mileage, market expenses, etc.

Enter on appropriate lines on Schedule C

Carry total to front page of 1040.

This will likely increase your taxable income a couple hundred dollars.

If you have filed a Schedule C in the past they will expect to see it again, I would guess.

The box full of receipts comes from spending lots of money doing something with the intention of making a profit. Many people do not make a profit and believe that the receipts will help prove that it WAS a business and not a hobby. You can not write off expenses of a hobby but you do get to count the income.

Generally, some businesses are started to help shield the W-2 income. Rentals are particularly good at this because you get to use depreciation to cancel out the rental income. This negative number gets carried to the front of your 1040 and gets used to reduce taxable W-2 income.

Of course when you sell the rental, then you have to deal with recapture and gain, etc etc etc.

For a real small business that only makes a couple hundred a year there is actually a cut off where you don't have to report it, but I don't remember if it's $600 or $400. I know it's different than the cutoff for a 1099.

Realistically if you're not making much more than gas money I don't think the IRS cares and if you're not making a sizable profit you're just doing it for fun anyway. There's actually a whole pamphlet from the IRS about Schedule C and business expenses but I think that would be overkill in this case.

Yeah, I used to do this for fun (some of us are just twisted that way).

I look forward to hearing other's suggestions.

[pcooley]

I've been filing a schedule C for many years now. I go back and forth about reporting my costs. I don't have a shoebox full of receipts, but I do have an envelope with two or three receipts from the grocery store with the cost of mason jars circled. I get confused because I do say that my business carries an inventory - jars of honey. The only cost to me is the cost of the jars. At one point, I claimed the cost of the wood to build the hives. I suppose the hives depreciate, but I have no idea how to calculate that. It seems to get silly to me when I spend $48 on jars, and then remove two jars of honey for personal use, $2.40 worth. If I have two empty jars at the end of the year, is that carrying forward $2.40 worth of inventory? There's NEVER any honey left at the end of the summer. It's either all sold or I've removed it for personal use, so I always say I have no inventory even though I may have some empty jars, and I'm haunted by the idea that I should claim those fifteen to twenty dollars worth of jars as carried forward inventory.

Like I said, it seems silly. If there was an actual person looking at my return, they would probably get a good chuckle. Some years I don't claim the cost of the jars because it seems like so ridiculous accounting for the jars I've eaten. And what of the jars I gave to friends? It's not really advertising. It's such a small scale, it doesn't seem worth bothering about.

[pcooley]

I'm also somewhat baffled by the fact that there is no material evidence of my business sales. I haul a dozen jars of honey to the Farmer's Market, sell them, and then enter $96 in my financial software under Business Income:Carfree Bees:Honey Sales. That's it for record keeping. I'd be more than shocked if I was ever audited, but if I were, am I going to look like a doofus? "Yeah, well, I sold the honey, and then I wrote it down in the software there."

At the height of my business, when I was making around $4000 a year selling honey and removing bees from houses, I thought about opening a business checking account, but there didn't seem to be enough money to worry about it. I just keep a "business cash" account in my software, and I transfer it to "cash" before I spend it.

[ToomuchStuff]

http://www.irs.gov/uac/Is-Your-Hobby-a-For-Profit-Endeavor%3F

You can have a state/local business and not make enough to qualify as a federal business, in my understanding (in part due to local restrictions).
Do you deduct your required local licensing? (that would be what I think you would need clarification on)

[pcooley]

I think to the extent that I don't rely on the income, particularly, though it is nice, it qualifies as hobby income. It would seem simpler to report it as such, but I don't know if it would throw up some red flag if I stopped filling out schedule C and started filling out hobby income. And it looks, from reading the New Mexico state website, that as long as I'm making money at something I need my gross receipts tax reporting number, and I have a city business license, so maybe it's easiest to stick with schedule C.

Whoever imagined being a tiny business would be complicated.

[SteveinMN]

Paul, I would stick with Schedule C. I know it seems overkill, but if you do enough business to need a business license, then, in the eyes of the taxing authorities, you are a business. Short of being able to prove you've dissolved the business somehow, lack of a Schedule C would look a little odd after so long filing them. TurboTax should make that as painless as it can be.

Yeah, it seems like overkill sometimes. As a photographer for hire, I hold no "inventory" and, beyond the cost of my tools, have no real "cost of goods sold". However, between our rental property, a short sale, and the business, we decided a couple of years ago to have an accountant do the taxes. More expensive than TurboTaxCutOnline, but much simpler and worth it to us.

[Dhiana]

I agree with the others re Sched C and to continue moving forward using it. They may get a chuckle at it as you say now, but I'd rather write in those small sums than have an audit and get nailed because I didn't write in those couple of small sums.