Hobby "Gross Income" or Gross Revenue"?

[SFA]

Using the terminology on the Schedule C, "gross income" is sales minus cogs. If gross income is negative, is anything reported on line 21?

 

 

 

 

[ljwalters]

with hobby total income is on line 21 and expenses are on Sch A subject to 2%

[SFA]

with hobby  total income is on line 21 and expenses are on Sch A subject to 2%

 

I respectfully disagree. Certain operating expenses may be deducted on Schedule A (subject to 2%), up to gross income (which is the amount shown on line 21).

 

From IRS Pub 535:

 

Gross income from a not­-for­-profit activity in­cludes the total of all gains from the sale, ex­change, or other disposition of property, and all other gross receipts derived from the activity.Gross income from the activity also includes capital gains and rents received for the use of property which is held in connection with the ac­tivity.

 

You can determine gross income from any not­-for­-profit activity by subtracting the cost of goods sold from your gross receipts.

 

However,if you determine gross income by subtracting cost of goods sold from gross receipts, you must do so consistently, and in a manner that follows generally accepted methods of account­ing

[jklcpa]

Using the terminology on the Schedule C, "gross income" is sales minus cogs. If gross income is negative, is anything reported on line 21?

 

 

I would say 'no' since, in general, hobby losses cannot offset other types of income. If gross income from the hobby is less than zero, I don't think you can put a negative figure for hobby "income" on line 21 and have it reducing other income to arrive at total income or AGI on the 1040.  I don't have a cite for this without looking though.

[SFA]

Thanks for jumping in Judy. A agree, we cannot enter a negative amount, but do we enter zero?

 

The example I have is a craft hobby with sales of approx $2,000 and cogs of $2,300. Gross income -$300.

 

The person is selling her items on ebay, but it turns out that she is not recovering her direct costs.

[jklcpa]

I don't know the answer about entering zero.  Do you want to do that to document that you've considered the income and reported "something"?   I pulled out an old Master Tax Guide and was then reading Reg 1.183-1 through 1.183-4.  Maybe the answer is in there somewhere.

 

Are there any costs that might be moved out of COGS as more indirect costs, or any that should be considered withdrawn for personal use, or is this person really not able to get the prices she dreamed of?  Is she making jewelry and wearing it or giving some of it as gifts?  I had one of those clients that was doing all of that and had big dreams with tiny profits.  lol

[SFA]

Sadly, what she hoped would be a business has turned into a real flop. Her items cost more to produce than the ebay market is willing to pay. She may be selling in liquidation mode and just trying to recover something/anything for them.

[kcjenkins]

Sadly, what she hoped would be a business has turned into a real flop. Her items cost more to produce than the ebay market is willing to pay. She may be selling in liquidation mode and just trying to recover something/anything for them.

In that case, there is really nothing to put on line 21, as long as you are treating it as a hobby, rather than a business, 

[clay]

Have you questioned the client on how they come up with the cost of goods sold, especially the ending inventory?

[SFA]

Clay, yes we have the detail records that show her direct cost of goods sold. We have treated the activity as "not-for-profit" in 2014 and have asked the client to continue to keep records for all sales and costs so that we can revisit the status on the 2015 return. She is ok with this determination. Thank you for weighing in.

[Abby Normal]

http://www.irs.gov/uac/Form-5213,-Election-to-Postpone-Determination-as-To-Whether-the-Presumption-Applies-That-an-Activity-Is-Engaged-in-for-Profit

[Abby Normal]

Why not put it on Sch C? How many years has she been at it?

[Abby Normal]

Right from the IRS Audit Guide:

 

Treas. Regs. § 1.183-1(e) provides that for purposes of IRC § 183, gross income includes the total of all gains from the sale, exchange or other disposition of property and all other gross receipts derived from such activity. It also provides that gross receipts from the activity may be reduced by cost of goods sold to determine gross income

 

http://www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/IRC-183-Activities-Not-Engaged-in-For-Profit-ATG

[DANRVAN]

The fact that she got out of the business because it was not profitable is a factor in determining that she was in it for a profit.  That was a determining factor in the tax court case won by the banker / weekend race car driver.  Unlike the hobby loss taxpayers that forge ahead with an activity because of the personal pleasure involved.

Edited March 4, 2015 by DANRVAN

[BulldogTom]

The fact that she got out of the business because it was not profitable is a factor in determining that she was in it for a profit.  That was a determining factor in the tax court case won by the banker / weekend race car driver.  Unlike the hobby loss taxpayers that forge ahead with an activity because of the personal pleasure involved.

There was also a case for a professional bowler.  Tried for several years to make it on the bowling circuits.  KEPT METICULOUS RECORDS.  Changed coaches, went to different leagues and circuits to try to make a profit.  Gave up after several years.  One of the biggest factors the court took into consideration was that she quit after exploring all options, and before  the IRS audited her.

 

I don't have the cite on that one, it was part of an update seminar I attended several years ago and I never forgot it.  I love it when the taxpayer wins.

 

Tom

Newark, CA