When does selling frags become a business?

[Reefs and Geeks]

I'm curious at what point would selling frags turn from a hobby to a business that would require you to collect and pay taxes on your sales. At the moment ive sold maybe a dozen shipments of a few frags and had a few people over to pick frags up. I'm going to be selling as a hobbyist at my first frag swap in May, and am curious if I need to worry about any tax or legal issues with potentially selling a few hundred dollars worth of frags. Ideally I'd like to be going to 3-4 frag swaps in driving distance a year to sell at.

 

[Johnd651]

Technically I believe anything can be reported as self employed income when doing taxes at the end of the year. But that's not to say you cant sell a couple things on the side for some extra cash. If you start swiping cards, it becomes a little different as well.

 

[NHgoalstop]

Technically I believe anything can be reported as self employed income when doing taxes at the end of the year. But that's not to say you cant sell a couple things on the side for some extra cash. If you start swiping cards, it becomes a little different as well.

Also, at that point you'd start writing down expenses to claim against your sales.

 

[hotdrop]

More than 599$

 

[DangerDave]

I sell a ton of frags to my local reef club (and probably buy just as many). Lol I should make it a business, I’d love to take the loss on my taxes!

 

[Johnd651]

I sell a ton of frags to my local reef club (and probably buy just as many). Lol I should make it a business, I’d love to take the loss on my taxes!

As mentioned above, the one benefit is deductions. If a business, once you account for miles traveled, stuff like phone or internet, if doing online sales, even potentially your setup may be a deduction, and you may be showing a negative income.

 

[Reefs and Geeks]

Good point on the deductions. I've been tracking my tank costs vs income from frag sales since I started in April and I'm up only about $50, but I've put alot of money back into my setup and have more coral and tanks than I started with.

 

[Marlon C]

Why get the government involved? I dont think they grew or propagated your corals for you why should they get some of your profit??

 

[Silent]

Any profit is considered income. Even garage or yard sales are considered earned income. Whether or not you sell enough to be considered a business is a different story.

 

[JP&JL]

Look at it like bartering which is what a large part of the world that doesn’t have to fund an over abundance of bad social programs and waste money on ineffective government agencies with taxes still currently does. If the IRS ever shows up to your door to ask about your coral selling something has gone very very wrong or you are making bank

 

[hotdrop]

Irs will want a cut of your papal profits quite quickly. Cash might take longer

 

[mbmartin06]

Good point on the deductions. I've been tracking my tank costs vs income from frag sales since I started in April and I'm up only about $50, but I've put alot of money back into my setup and have more coral and tanks than I started with.

then you get to add depreciation for the equipment you use. It will end up being a loss and if big enough could help you with you taxes on your normal income. Just don’t try to get a mortgage and it’ll be fine

 

[Shirley Weller]

The IRS only allows you to claim losses on your business for three out of five tax years. After you claim a loss for three of the five years, the IRS will classify your business as a hobby. Hobbies are not tax deductible so you won't be able to claim any of your expenses on your taxes.
Also the number one red flag that will cause the IRS to take a closer look at your return is the home office deduction.
The deduction is really not worth the risk of a possible audit relative to the dollar amount of the deduction you’d be taking. Later when you sell the house, the portion of your house that you designated as a home office will have to be reported as a sale of business property.

 

[Reefs and Geeks]

I haven't treated my frag sales as a business except record keeping for my own personal information so I could track my costs against sales to make sure I wasn't overspending on my hobby. As much as I'd love to make a nice amount of profit from selling frags in the evenings and on weekends, I'm certainly not there yet. My net profit overall from last year was only about $50 and I've of coarse already spent that on my tank this year.

I'm mainly trying to gage at what point is it typical to consider frag sales to be significant enough that I should be reporting the income as taxable income. My wife is in the process of starting up a small business making and selling candles which has got me to thinking about when I would need to treat frags as more than a hobby (at least in the IRS's eyes). I'm sure I could do quite a bit of sales before the IRS seeks me out, but would like to know the right way to do it.

From what I can find based off of the posts so far, it does seem that for "Hobby Income" you do have to report any profits as income, but can then deduct hobby expenses as well as long as they don't exceed the revenue at which point it would be a wash. In this case you'd not be able to use the excess hobby expenses to deduct from your other income, but could still be used to deduct from your hobby income. I'm finding a few places that say the total profits need to exceeds $400 or $600 before it needs to be reported at all.

 

[Reefs and Geeks]

Irs will want a cut of your papal profits quite quickly. Cash might take longer

I'm curious on this if the IRS will automatically try to assume any money received from paypal is income. What I mean by that, with this hobby in particular, is a $100 payment through paypal might only be for $50 worth of product, and the other $50 would be shipping costs. I guess you'd just track your shipping costs separately and deduct those?

 

[Reefs and Geeks]

One more thing just out of curiosity is deducting hobby expenses on used equipment. Say I had $1,000 in frag sales, but used $800 to buy used tanks and reefing supplies from someone and paid cash in person. Is there any good way to track that expense that the IRS would accept?

 

[pdxmonkeyboy]

You track it the same way businesses do... with a spreadsheet.

Money in and money out.

They dont split your paypal income up. It's all income..because.. well, it came in.

It's up to you to record that you spent $50 on shipping on that transaction.

 

[LadyTang2]

So if its a profit or 400, 600 or whatever, isnt that only after you ahve recouped the tank setup costs? So like basically never for most of us. But if your taking in 2g/yr w cards maybe the irs might come after you? But then you just tell them the tank costed you 8g? Its gotta be total cost inlcuding setup not just ongoing right cost right?

 

[Johnd651]

One more thing just out of curiosity is deducting hobby expenses on used equipment. Say I had $1,000 in frag sales, but used $800 to buy used tanks and reefing supplies from someone and paid cash in person. Is there any good way to track that expense that the IRS would accept?

Simple as excel, or a paper ledger, and then gets more high tech from there. I have used Wave, sap, and run my accounting firm through quickbooks. In the end it's all the same as long as you can show cash flow in and out. Gets more complicated with inventory, payroll, etc.

 

[Tuffyyyyy]

It's been a while since I took the exam but you can deduct expenses to the extent of your income, and it needs to exceed $600.