A business major I'm not.

OhEddie

Not long ago I changed my site to the Pro level and have made an effort to make a little money at this.

So the cash is starting to come in and I have some questions as to what my options are.

First, this is not my primary job. It's not how I make a living and I don't expect it to be.
So, that being the case, is it possible to start an LLC in order to say I'm a business, and reap the tax benefits? Or will the IRS say I don't qualify, because to them, what I do is considered a "hobby"?

What criteria must be met, in the eyes of the IRS, to get from the hobby level to the business level.

I am aware that having a home based business is an area highly scrutinized by the highly regarded, wonderful, hard working, fine Americans, employed by the IRS. (You never know when Big Brother is watching)

Don't say "consult a tax specialist". I'm not making that much money. That's why I use Turbo Tax.

Also, I'm not not considered to have made any money until Smugmug sends me a check. Correct?

Another option may be to just let the money pile up in Smugmug's account and then ask for my money after I retire and I'm in a lower tax bracket. Not that I'm in a high tax bracket now.

Thanks for your advice.

ChatKat

You get what you pay for....
You get what you pay for.

A second business reaps lots of tax rewards and can offset income from your primary job reducing your tax bill. Enough to make the cost of a real consultation - also a tax deduction - more than worthwhile. Same thing goes for the type of business entity you choose - they are dependent on multiple factors.

A photographer, who is not a tax practioner, is not the place for tax advice. You wouldn't pull your own tooth - you'd go to a dentist. Frequently, the same issue applies to tax advice. One size doesn't fit all. Tax advice is unique to you because everyone's situations are different.

It costs a lot less than you think and particularly when it will save you a lot more than it costs. It's fair to disclose that I am biased. I am an accountant.

Scott_Quier

Disclaimer: I'm not a tax professional nor am I a lawyer. YMMV.

LLC is easy in most states but is not necessary in order to support your claim of being a business - in which case you would be a sole proprietor. Most localities will require you to register your business - get a business license.

Being a business is acting like a business. Things like recording vehicle mileage, making and keeping appointments with clients, a promoted web-presence where you are actaully trying to sell product (you already have that I think).

If you bought your equipment, your business needs to buy/rent that equipment from you. Most businesses have assests.

Many small business are run on a "case basis" (I think that's the term) - means you haven't made money until you actaully deposit it in the bank.

Your plan to leave all your money with SmugMug, I think, has a number of serious holes in it. Among them that you can't declare expenses in excess of your revenue. So, if your smugmug account is the primary source of revenue .... you see the problem?

ChatKat

Scott,

You do not buy or rent equipment from yourself. Your business owns it and depreciates it. If you are using equipment that you paid for, it becomes your investment in your business and the business owns it.

A small business is usually run on a Cash Basis. That means you deduct expenses when you pay for them and you report money as income when you receive it.

As for forming an LLC, there are some new tax regs relating to one owner/member LLC's and they must take formal payroll. See your accountant. For 2009 they are more complicated than they used to be.

Scott_Quier wrote:

Disclaimer: I'm not a tax professional nor am I a lawyer. YMMV.

LLC is easy in most states but is not necessary in order to support your claim of being a business - in which case you would be a sole proprietor. Most localities will require you to register your business - get a business license.

Being a business is acting like a business. Things like recording vehicle mileage, making and keeping appointments with clients, a promoted web-presence where you are actaully trying to sell product (you already have that I think).

If you bought your equipment, your business needs to buy/rent that equipment from you. Most businesses have assests.

Many small business are run on a "case basis" (I think that's the term) - means you haven't made money until you actaully deposit it in the bank.

Your plan to leave all your money with SmugMug, I think, has a number of serious holes in it. Among them that you can't declare expenses in excess of your revenue. So, if your smugmug account is the primary source of revenue .... you see the problem?

Cygnus Studios

OhEddie wrote:

Don't say "consult a tax specialist". I'm not making that much money. That's why I use Turbo Tax.

One other important factor about using an accountant, is that they will save you money when forming a business entity. There are companies that will do this for you, but they do not offer the same quality of service as a dedicated accountant.
It isn't easy finding a good accountant, and it often is cheap, but the money that a good accountant will save you far outweighs the costs.

I know that this isn't what you want to hear but ChatKat is correct. The rules change all the time, and if you aren't working with someone who stays on top of this stuff, you are truly limiting yourself.

Scott_Quier

ChatKat wrote:

Scott,

You do not buy or rent equipment from yourself. Your business owns it and depreciates it. If you are using equipment that you paid for, it becomes your investment in your business and the business owns it.

A small business is usually run on a Cash Basis. That means you deduct expenses when you pay for them and you report money as income when you receive it.

As for forming an LLC, there are some new tax regs relating to one owner/member LLC's and they must take formal payroll. See your accountant. For 2009 they are more complicated than they used to be.

Kathy,

Maybe I wasn't clear or maybe I don't understand what I think I know. Either way, I guess I should talk with my tax professional to get it clear in my head.

What I was trying to say is that if a person buys something as, for example, a hobbiest photographer and then starts up a business - how does the business depreciate that equipment unless it first takes ownership of it? Or, can a sole proprietor depreciate equipment just because he/she uses it to make photographs he/she hopes to sell? And if so, at what rate? How does one account for the fact that the equipment is working double duty - hobby and professional/business?

These are just questions that occur to me - not really expecting an answer here - that's what I pay my tax professional for

Matt336

Scott_Quier wrote:

Kathy,

Maybe I wasn't clear or maybe I don't understand what I think I know. Either way, I guess I should talk with my tax professional to get it clear in my head.

What I was trying to say is that if a person buys something as, for example, a hobbiest photographer and then starts up a business - how does the business depreciate that equipment unless it first takes ownership of it? Or, can a sole proprietor depreciate equipment just because he/she uses it to make photographs he/she hopes to sell? And if so, at what rate? How does one account for the fact that the equipment is working double duty - hobby and professional/business?

These are just questions that occur to me - not really expecting an answer here - that's what I pay my tax professional for

I'm an accounting student so I'll attempt to answer these questions, Kathy can chime in and correct me if I'm wrong here.

When starting a business, the sole proprietor would make an investment into the business (equipment, cash, etc). The rate of depreciation can be done a few ways and there is no "right way". A few ways are straight line, double declining (this is what you would use if you are doing "double duty", it basically is straight line depreciation times two), or you can use the IRS tax depreciation (called MACRs).

I agree that those that are interested in starting a business should seek an accountant.

OhEddie

Thanks everyone for your reply.

First, let's just forget about the "just let smugmug keep the money until I retire" thing. That was suppose to be a joke. I guess it didn't come across that way.

I'm still looking for an answer to my basic question.

Can I have a business of my own, preferably an LLC rather than a sole proprietorship, and at the same time be employed by someone else, and the someone else being, by far, my major source of income?

There is info on the net about this subject...
http://www.photoattorney.com/2005/12/is-your-photography-hobby-or-business.html
But it is rather general in scope.

I just thought I would ask here to get some examples from photographers that have some first hand experience with the "Making the leap from hobby to business"

If I am able to make that leap, then yes of course, I would consult an accountant. Even though there are places on the net that tell you how to start your own LLC, I surely wouldn't attempt to set up an LLC without an accountant.

Matt336

You should not have a problem having an LLC. I believe my roomate technically has an LLC. He makes automotive grilles and sells them on ebay and to other vendors. He does not make more at this "job" than he does at his dayjob. Take that with a grain of salt though. GA could be different than ND.

Scott_Quier

OhEddie wrote:

Thanks everyone for your reply.

First, let's just forget about the "just let smugmug keep the money until I retire" thing. That was suppose to be a joke. I guess it didn't come across that way.

Nope, missed the whole joke - the story of my life!

OhEddie wrote:

I'm still looking for an answer to my basic question.

Can I have a business of my own, preferably an LLC rather than a sole proprietorship, and at the same time be employed by someone else, and the someone else being, by far, my major source of income?

Yes. I'm in exactly the same position. My 9-5 pays all the bills, the weddings pay for the equipment to shoot more weddings and business related travel, etc. So far, I've not yet drawn any money from the business for personal expenses - just re-invest in the business.

OhEddie wrote:

There is info on the net about this subject...
http://www.photoattorney.com/2005/12/is-your-photography-hobby-or-business.html
But it is rather general in scope.

I just thought I would ask here to get some examples from photographers that have some first hand experience with the "Making the leap from hobby to business"

If I am able to make that leap, then yes of course, I would consult an accountant. Even though there are places on the net that tell you how to start your own LLC, I surely wouldn't attempt to set up an LLC without an accountant.

Sound judgement there.

ChatKat

Accounting for Small Businesses

Scott_Quier wrote:

Nope, missed the whole joke - the story of my life!Yes. I'm in exactly the same position. My 9-5 pays all the bills, the weddings pay for the equipment to shoot more weddings and business related travel, etc. So far, I've not yet drawn any money from the business for personal expenses - just re-invest in the business.
Sound judgement there.

First for the accounting student...MACRS for small business is the required depreciation method. Most small businesses take a Section 179 deduction for fixed asset purchases.

For Scott: When you buy equipment that is used for business and personal use - like a car or a comptuer or a camera etc. you are required to keep a log for personal use and then you would allocate the expenses to the percentage of business use. So let's use the car. If you drive 25% for business you get to deduct 25% of the expenses and depreciate 25% of the depreciable amount. If you are a sole proprietor, then when you buy equipment that is shared, you deduct for the business portion on your Schedule C. But let's say you bought something that was 100% business use and then you started your business - you are the business so you would deduct it and depreciate it. There is no buying or borrowing. You and the business are one. If you incorporated, you would make a capital contriburtion of the equipment to your corporation and then the corporation would issue you some form of payment - stock, or a loan would be recorded to you for the contribution of the asset.

For those who want to form an LLC - if you are a sole member of your LLC, you file for tax purposes a Schedule C. But, you will still have a payroll obligation to yourself from your business. A Schedule C Sole Proprietor does not have that obligation. They profits are all theirs right to the Schedule C.

OhEddie

Thanks again, this is the kind of discussion that could help quite a few people.

I just remembered that one of the guys that my son has played baseball with, and has helped me coach, was an accountant here in Georgia. So I gave him a call. The best thing he told me was that he would be glad to help me any time at no charge. I've given him a lot of photos of his kids playing baseball over the years.

Some of the things he told me was that the main reason to form an Limited Liability Company (LLC) was the Liability benefits. He said if I was, say, a metal fabricator, and I built some industrial stairs and someone got hurt because you forgot to weld one of the steps properly, your company, not you, could be found negligent and therefore liable for damages.

But a photogrpher has a very low level of risk. I mean, what are you going to do? Fall into the wedding cake? Is your flash going to set the brides dress on fire? Not likely. So I don't need the extra cost of setting up an LLC. Just go with the sole propritorship and file a schedule C.

And yes, I can be employed by someone else and still have my own business. The hobby/business question is moot as long as you show that you are making a profit according to IRS guidelines.

I feel much better going forward now. It's good to have friends.

Scott_Quier

OhEddie wrote:

Thanks again, this is the kind of discussion that could help quite a few people.

I just remembered that one of the guys that my son has played baseball with, and has helped me coach, was an accountant here in Georgia. So I gave him a call. The best thing he told me was that he would be glad to help me any time at no charge. I've given him a lot of photos of his kids playing baseball over the years.

Some of the things he told me was that the main reason to form an Limited Liability Company (LLC) was the Liability benefits. He said if I was, say, a metal fabricator, and I built some industrial stairs and someone got hurt because you forgot to weld one of the steps properly, your company, not you, could be found negligent and therefore liable for damages.

But a photogrpher has a very low level of risk. I mean, what are you going to do? Fall into the wedding cake? Is your flash going to set the brides dress on fire? Not likely. So I don't need the extra cost of setting up an LLC. Just go with the sole propritorship and file a schedule C.

And yes, I can be employed by someone else and still have my own business. The hobby/business question is moot as long as you show that you are making a profit according to IRS guidelines.

I feel much better going forward now. It's good to have friends.

The protection offered by LLC is not what it used to be; that wall has a lot more holes in it than it used. That having been said, the wall is still there and will provide protection better than no protection at all.

As for the liabilities: consider that you have lightstands that are not the most stable things in the world. One with a strobe on it falls overf and hits someone on the head - hmmmmm, better to have some liability insurance.

As for the profit thing, according to my tax professional, and I asker her this specific question, as long as I can show that I am consistantly attempting to make a profit I have no real fears of being categorized as hobby. That's where the records, appointments, etc come in handy - again, according to my tax professional as applied to my personal situation.