Denise likes to restore old furniture. She searches craigslist for items being given away, goes to garage sales and estate sales and picks up old stuff on the cheap.
She restores or sands and paints the items. She starts a facebook community and invites people to join and see her stuff and post photos of their own. People like her stuff and she gets offers to buy. Denise starts to sell, because the process costs and she has limited space. The more stuff she sells, the more she likes going and finding stuff and restoring.
My question in this hypothetical is ‘At what point would this be a business and not a hobby? When would the law require her to obtain a business license and start paying taxes on the stuff she sells?’
AFAIK you are required to declare the earnings on stuff you sell from day one. All income is supposed to be declared. Of course you can claim the cost of buying the furniture, paint etc etc. Thats the law, of course many many people who do this kind of business don’t declare their earnings.
Here is how to register as a sole trader in California, I’m doubtful you’d need any business license at all, just register a business name for $26 and thats it.
coremelt is correct that the first dollar of income from a hobby is supposed to be reported on Schedule C for federal taxes. Even before the first dollar is earned, the same form can be used to deduct hobby expenses as business losses. You can do this for a number of years (maybe seven?) before you need to show a profit and pay taxes on it.
In Australia they have a fairly nasty addition to this. If you have another source of income and your hobby earns less than $20,000 a year, its not counted as a business and you can’t claim expenses (but you still have to pay tax on income from it).
If its your only source of income that doesn’t come into play, the intention is to stop people with full time jobs from claiming their warhammer 40k addiction as a business because they once won $50 in a tournament (for example).
Thing is, there are probably multiple answers, depending on what context.
For instance, are you asking whether the IRS will let you deduct expenses (as a business expense), whether the state requires a business license, or whether it’s legal to run the business in an area zoned residential? I suspect there will be different answers for each of those questions.
coremelt, that is pretty nasty from my perspective. I have made money from music for most of my life. In fact, I declared music income on my tax returns from 1970 through 2010. I always made a profit, but I don’t think my gross ever exceeded $10k, and it woas never my sole source of income for an entire tax year. If I had been unable to deduct expenses, that would have altered the incentives quite a bit.
When you operate a business you are allowed to deduct the costs and expenses of running that business against the income that business generates. You can even have losses that are greater than your income that you can offset against other income you may have, or even carry forward to future years to offset against future income.
But if your activity is determined to be a hobby, you may only deduct expenses to the extent that you have income from that hobby. You may not use those hobby expenses to offset other income or carry forward to future years.
The IRS requires you to start paying income tax on your hobby when your profit for the year exceeds $400.
As for business licenses, that depends on the location and the type of business. For example, if your hobby is installing decorative door knockers, the state of Oregon requires you to obtain a CCB license before you make dollar one, or even before you start handing out business cards, merely offering to do such work with the expectation of compensation. Your local laws will vary.
But even if the IRS declares it a hobby, that may not absolve you from the obligation to obey local laws about licenses et cetera. Again, it depends on the jurisdiction and what type of work you’re doing.
Things like model train shows exist to give people an opportunity to make enough money off their pet hobby that it doesn’t put them in the poorhouse.
My son loves the model train show. I’m actually kind of glad we don’t have room for the hobby, because I’m afraid if he wanted to get into it, I’d be a pretty soft touch.
Excellent rundown … couple of nitpicky things but otherwise a great description of how the IRS deals with this.
California has sales tax, the OP needs to find out if restored furniture is subject to this. One of your best sources of information will be the local Small Business Administration. I found them to be wonderful in helping get business started on the right track.