Can I ask a tax question here

RandySmugMug

How can I offset smugmug income w/ equipment expenses ?
I suspect it's an equip depreciation thing...can anyone point me to details...

Example:
I make $5k in 2007 from smugmug. If I spend 5K on new equip do I then owe no tax.

thx

mike_k

For equipment, you have the choice of depreciating the item over several years (the number depends on what the item is), or you can elect to deduct the full amount in the first year using the Section 179 Deduction. There's a $100,000 limit per year for this deduction.

You should also look into other expenses you can deduct - like your SmugMug fee, mileage to and from a photo shoot, printer ink/paper, books, memberships like NAPP, software and even your computer if you bought it this year (you can only deduct the portion used for business purposes, so if you use your computer only 50% of the time for work, you can only deduct 50% of the cost - same with the camera.)

To do any of this you'll need to use schedule C with your 1040. One catch is that you might also have to pay self-employment tax. It would probably be worth while to spend a little time with a CPA or at the very least use software like TurboTax to walk you through your schedule C stuff. It also might be good to look at a "Home Business for Dummys" type book.

RandySmugMug

mike_k wrote:

For equipment, you have the choice of depreciating the item over several years (the number depends on what the item is), or you can elect to deduct the full amount in the first year using the Section 179 Deduction. There's a $100,000 limit per year for this deduction.

You should also look into other expenses you can deduct - like your SmugMug fee, mileage to and from a photo shoot, printer ink/paper, books, memberships like NAPP, software and even your computer if you bought it this year (you can only deduct the portion used for business purposes, so if you use your computer only 50% of the time for work, you can only deduct 50% of the cost - same with the camera.)

To do any of this you'll need to use schedule C with your 1040. One catch is that you might also have to pay self-employment tax. It would probably be worth while to spend a little time with a CPA or at the very least use software like TurboTax to walk you through your schedule C stuff. It also might be good to look at a "Home Business for Dummys" type book.

thx Mike !

kml

It mostly depends on how you treat the income. Is it a business or a hobby? As a hobby you can only deduct up to how much you brought in. And you can only have this hobby for a couple of years before the IRS says you must make it a business.

If it is a business, you can deduct all your expenses, and spread the equipment expenses over several years if you elect to.

Mike gave some good advice regarding the CPA and home business books. Good luck!

RandySmugMug

kml wrote:

It mostly depends on how you treat the income. Is it a business or a hobby? As a hobby you can only deduct up to how much you brought in. And you can only have this hobby for a couple of years before the IRS says you must make it a business.

If it is a business, you can deduct all your expenses, and spread the equipment expenses over several years if you elect to.

Mike gave some good advice regarding the CPA and home business books. Good luck!

what distinguishes it as a business vs a hobby ?
I just ordered:
Home Business Tax Deductions: Keep What You Earn"

thanks !

aktse

RandySmugMug wrote:

what distinguishes it as a business vs a hobby ?

disclaimer: not a tax person, etc. You need to contact someone who knows more than I do for the official answer

Basically, a business makes a profit in which the government can tax you on. Hobby is just that -- a hobby, something that you enjoy doing and don’t pay taxes on the profits since you don’t make very much on it. I don’t remember the max amount that you can make before you have to report income tax in it. You can deduct business expenses but you can not deduct hobbies expenses.

In general, you need to make a profit three out of five years to be classified as a business [if I remember correctly]. If you fail to make a profit, then it turns back into a hobby and you can't deduct the expenses anymore.

I turned a crafting hobby into one of those home based business years ago (one of those pyramid selling things). My friends talked me into joining because I would give them discounts and they promised to buy enough to meet my minimums. In return, I got to write off my hobby as a business expense. In addition, my tax account was able to write off a bunch of stuff for me even stuff that I didn’t think about, i.e. camera for shooting samples, website, partial cell phone (business use -- i.e. calling my girlfriends over to work on crafting projects), postage stamps. I was also told that home based business have a higher chance of an audit so keep good records of things.

Talk an accountant and file a schedule C.

mike_k

aktse wrote:

In general, you need to make a profit three out of five years to be classified as a business [if I remember correctly]. If you fail to make a profit, then it turns back into a hobby and you can't deduct the expenses anymore.

Reporting a profit three out of five years is correct. This is called the "safe harbor" rule. However, even if you don't meet this criteria, you could still qualify as a business. You would need to keep very good records of every expense, and would have to show that you're a serious business - show that you're trying to be profitable, i.e. that you have a "profit motive". This would include having things like advertising, a marketing plan, a separate business bank account, even business cards.

They (the IRS) are just trying to avoid having people like me who earn $10 from SmugMug this year turn around and deduct $5k for a camera for a nice loss (which would reduce my taxable income). Clearly in this case this would be a hobby and not a business.