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Old 02-26-2012, 02:16 PM
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Working From Home

Me and my fiance are artists who take commissions to make digital art for people. It was just a small side thing, less than 500 a year (more like 200 if we were lucky), but then we got into advertising it last month and now business is booming to the point we're making more off of it than our full time jobs.

So, now comes the time to start worrying about taxes. We've started keeping all receipts that have to do with art expenses. Should we register as a home business? Is it mandatory or merely advantageous? Is there anything we should know that we probably don't?

I'm completely new at this... I know nothing about tax law or registering as a home business... and I barely muddle through my usual yearly income taxes.



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Old 02-27-2012, 08:44 AM
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“Should we register as a home business?”---->I guess it depends;the IRS reminds taxpayers to follow appropriate guidelines when determining whether an activity is a business or a hobby, an activity not engaged in for profit. In general, taxpayers may deduct ordinary and necessary expenses for conducting a trade or business. An ordinary expense is an expense that is common and accepted in the taxpayer’s trade or business. A necessary expense is one that is appropriate for the business. Generally, an activity qualifies as a business if it is carried on with the reasonable expectation of earning a profit. In order to make this determination, you should consider if the time and effort put into the activity indicate an intention to make a profit ;you depend on income from the activity or etc. The IRS presumes that an activity is carried on for profit if it makes a profit during at least three of the last five tax years. If an activity is not for profit, losses from that activity may not be used to offset other income. An activity produces a loss when related expenses exceed income. Some activities are viewed more skeptically by the IRS than others. Craft businesses are often viewed as hobbies, where a consulting business or professional firm might not be.
“ Is it mandatory or merely advantageous?’---->As described above; NOT mandatory bur it depends on the situation.
“ Is there anything we should know that we probably don't?”----> Many legitimate businesses start out with a loss their first few years. But the IRS expects that a legitimate business will be set up to make a profit, not just have a hobby. Unfortunately, some people start "businesses" which are really hobbies just to claim the expenses and the loss on their tax returns. These situations have caused the IRS to look skeptically at all small businesses that have a hobby component to them, making it more difficult for businesses to be viewed as "real" if they have losses at start-up. If you follow these guidelines, you can minimize your chances of being considered a hobby.



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Old 02-27-2012, 01:55 PM
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So, if it's seen as a hobby, can we still use our supply costs as a tax deductible? And what is we aren't registered as a home business?



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Old 02-27-2012, 02:20 PM
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“So, if it's seen as a hobby, can we still use our supply costs as a tax deductible?”---->Yes however, as said previously up to yur hobby income.
“ And what is we aren't registered as a home business?”--->(Even though you aren’t registered as a home business)As long as you report the income on Sch C/ Sch SE, you can deduct the supply costs as part of your COGS to reduce gross profit on Sch C.



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Old 02-27-2012, 02:26 PM
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Or you can deduct your supply costs on Sch C line 22 as part of your business operating expenses;if it is seen as a hobby, then you need to rpeort your income on 1040 line 21 and you cna dedcut your supply up to the income on 1040 line 21.



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