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Old November 27th, 2006, 07:25 PM   #1
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When does the hobby become a business?

There are a lot of pros on this site and I hope you can help an amature out....
I'm a 50 year old guy with a good middle class career....
I'm not looking to start a new line of work, but it appears to have found me.
I don't mind makin' a few bucks on the side from a hobby either, I just don't want to have tax/business/legal issues.
Here's my story.....

The past few years I've been involved in drag racing, motorcycle drag racing. Last year I decided to video my racing and post it for my out-of-state kids and family to "keep up" with the action.
I picked up a Panasonic GS250, added a Sony mic, a mixer, a Manfrotto tripod, wide angle lens and some batteries....nothin' fancy, just amature stuff.
I started videoing my race weekends, editing each weekend down to 13-14 minutes with Vegas 6 and posting them on my website for my family....
Turns out the other racers like them too....
By the end of the summer I'd get a couple of hundred hits a day on my video page after I posted a race video...

I had requests before the race series banquet for a full resolution DVD version of my videos from the other racers.
I made 25 nicely printed DVDs with full menus, 49 minutes each, in plain paper envolopes and brought them to the banquet.
The series promoters let me put them out on their table...t-shirts, official series video, etc.....
I sold all of them at $5 each in less than 10 minutes...(there was only 60 people there)....

Here is my dilemma....
The series promoters offered me the job of making their official season video next year....
About 90 minutes, with plenty of race footage, some interviews and an informational segment about the series.
He offered what I think is a fair price plus $5 per finished video delivered....
They're not happy with the guy they've been using and they like my work....

The question...if I take it...what are the legal/tax/business ramifications of doing this?
Have I already crossed the line selling the first 25?
Do I need to protect my name? Do I need a company name?
Do I need to register my name or pay taxes?
Do I just need to spend more time searchin' and readin'?
I live in Illinios if it matters....
I don't need a big hassle for the money...but I like making the videos and I wouldn't mind making more....

Sorry for the rediculously long post....
And the low res versions of my videos are on my web site if your interested.

Bob T.
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Old November 27th, 2006, 07:56 PM   #2
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Having just gone through an IRS audit you are over the line, if you get caught. On the other hand if you keep accurate and seperate records for monies while pursuing this hobby you can deduct up to what you make as an income.

If you want to start a business, contact a lawyer and accountant and they can take you down that road. It's not a rough road by any means, but there are a few pot holes along the way. Just ask Agent Jones.

Jim
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Old November 27th, 2006, 08:30 PM   #3
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Bob,

Listen to Jim as he knows what he's talking about! If you really intend on making this a business, then get all the forms straight and file with the IRS. But, basically it won't pay unless you are going to bring in good money. If you try to write off the equipment, then you need income to justify it. If you don't have that, the IRS will consider it a hobby and tax it as such. You won't be able to write off expenses.

Welcome back Jim. How was the trip to CR? Woops, Panama! Guess I'm thinking about Costa Rica because I did not sign up to go this year. Just not enough money to afford it. Best of luck my man!

Mike
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Old November 28th, 2006, 09:44 AM   #4
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Thanks for the answers guys.

No, I really don't see myself trying to make this into a real business. I've been lurking on this site for almost a year and I've learned how difficult this business can be. Not to mention I'd have to buy more/better equipment.

But if I can occasionally make a few hundred bucks from my "hobby"....I just wanted to know the risks. It sounds very similar to my racing. Some years I've made enough money racing that it is reported and I've paid taxes on it. I don't mind that, (don't like it, but oh well).

Now, if I continue to sell some of my DVDs through my web site, I'm I liable for sales tax? I don't want the state to come knocking on my door because I sold a dozen $5 DVDs.

Bob T.
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Old November 28th, 2006, 10:43 AM   #5
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Technically, what you are trying to do is a business. The feds are not really that difficult to deal with, they just want their cut. If you make $500.00 just report it and pay the taxes, but don't write off expenses. You can deduct what you blank DVDs cost, but not your equipment. That would be pretty simple. If you tried to write off your equipment, then you need to form the business and it gets tricky. For example, if you eventually write your equipment you will have the declare any sales of said equipment and pay the taxes on it. If you buy a camera for $1000, write it off, then sell it for $500 you will have to declare the $500 and pay taxes on it. It is a real hastle!

As long as you pay the Feds and don't deduct equipment they will probably have no problem. Go to your local IRS office and ask them.

The real hassle usually comes from the State, County, and City. They make their money from licenses and permits. Most all want you to have licenses, sales tax certificates and all. Here, where I am, the city also wants me to carry $1,000,000.00 in insurance to hold the "CITY" harmless. How stupid is that?!?!?!?! If I worked out of my house, which is what most of us do, the city will actually come and inspect my house and I can't use more than 100 square feet, a 10 x 10 room for example. Are you getting the picture???????

All of these hassles is why there is such a huge underground ecconomy in this country. Somewhere around 20% of all business dealings are unreported, and thus untaxed. That's what is called the "Underground ecconomy."

The States are not as bad as the cities and counties, as there are fewer permits. But, that's where the sales tax stuff comes in!

One benefit here in Florida, is that there is no state income tax. If I were to declare my income to the Feds and pay the taxes, the state never knows. In some states the way you file your state taxes is just basically a percent of your federal, and they collect the barest of information. In other, like California I believe, you have to break it down like on your federal forms, and that gives them access to info about your business,,,,What no License???

You selling a few DVDs under the table is probably not a problem at all. If this guy wants you to do them for him, just have him list you as an employee and give you a regular W-2 at the end of the year. That would make it simple enough.

Keep shooting though!

Mike
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Old November 28th, 2006, 11:16 AM   #6
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Thanks Mike.....

I don't know whether to be encouraged or discouraged though....

I try to live my life on the up and up, but sometimes they sure do make it difficult. And knowing Illinois like I do, I bet they make it extremly difficult, LOL!

Don't know how well I'm keeping things under the table either.....splashing it all over the www.

I guess I will approach this "hobby" cautiously.

Bob T.
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Old November 28th, 2006, 12:10 PM   #7
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Actually, Illinois is fairly easy and since you're basically down the street from me here's what I learned over the last 35 years, BUT REMEMBER I AM NOT A LAWYER so this is not legal advise!!!!!
First I have never been hasseled about a business license as I don't have a store front, I only occassionaly have a client here nor have I ever been hasseled about insurance. My office equipment is insured thru my HO policy and my gear is thru a seperate policy as is my liability insurance. As for deducting your gear, well if you do then you have a business which means lots more forms at tax time. If you declare the money you earn from your "business/hobby" then you just add it to you w-2 income on the 1040 line that asks for it and pay the additional taxes on the earned income.
As for deducting the cost of raw materials I think you can but here's my advise and again remember I am not a lawyer (broke my dear mothers heart with that one) I would ask your accountant exactly what you can and cannot deduct and what the cut off line is for declaring income. There are levels up to which you do not have to declare the income but again, neither a lawyer nor accontant am I. Ask your accountant (make sure he's well versed in home business) and you should be fine.
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Old November 30th, 2006, 07:17 AM   #8
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Simply put, my hobby became a career or a non-hobby when my desire to produce a good product on a consistent basis started eating into my personal money to the point I felt like the people I was doing the work for should pay for my time/equipment.

It was that simple for me. I decided if I would keep doing technical work such as web work, graphic work, and video work for others, then they should provide me with compensation for what I do. It was that simple for me.

I'll spare you the greedy people stories where I just worked and worked giving services away. It's hard to replace a worn out computer with a 'thankyou.'
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Old November 30th, 2006, 07:28 AM   #9
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If you all made was $500, not worth reporting it. After you deduct your materials cost, you had made, what, $350-400? I believe you don't have to claim anything under $600. Once you start getting into 5 figures, it becomes a complete different story. Get yourself a good accountant once business becomes consistent.
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Old November 30th, 2006, 08:36 AM   #10
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Thanks guys!

Actually, I have an accountant for my taxes due to my racing....
The tracks I race at keep track of how much I win and if I win more than $600 in a year, I get a 1099 and he handles it. So this should be no different.

But my other and bigger concern is sales tax.
If I start selling my personally produced videos on the web, off my own web site, what then?
It's not like a private sale.
I don't think it would amount to much in sales, but I did have some inquiries from some folks that would buy.
And I think selling a product is different that getting paid for a service.

I tried decifering it on the state's web site and it's a little overwhelming.

Bob T.
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Old November 30th, 2006, 10:40 AM   #11
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My hobby became a business when I made over $600 from one company and they issued a form 1099.

Ever since, I have made enough to write off a portion of the house and my tools of the trade. Cameras, monitors, cases, software, etc. I still make a profit even after all of that expense, but not much. Just enough to pay a little tax. I do so gladly. I have a lot more toys to play with so the government should get a small taste as well, right? Fair is fair.

It is kind of fun to stock up on tools and supplies every December to try to balance out the spare income.
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Old November 30th, 2006, 10:48 AM   #12
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Long ago, my accountant informed me that you must show a profit "Three out of five years" or else the IRS will consider it a hobby. But that was long ago, and I'm certain the laws have changed.

As you HAVE an accountant, best ask him how to approach this.

In some states, it's easier to not sell a "product" but rather a 'service'. Service providers are not required to apply for and collect 'sales tax' revenues and such. How to avoid this? Don't provide COPIES. In other words, charge for the service all the way up to providing a master tape/DVD. Hand it over to your client and say "Acme Duplication can make you XXX copies at XXX apiece." Sure, you may not make a bit of change off the duplication, but you save yourself the hassel of being a 'distributor' and 'retail' outlet. Again, check with your accountant for local as well as federal implications.
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Old November 30th, 2006, 01:18 PM   #13
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Quote:
Originally Posted by Bob Thieda
...
But my other and bigger concern is sales tax.
If I start selling my personally produced videos on the web, off my own web site, what then?
It's not like a private sale.
....
You need to talk to your accountant about that one. Every jurisdiction is different - some places have sales tax on goods but not services, some places on both, some have none at all. And here in Canada we have both federal GST and provincial PST to deal with, each with different rules as to what is taxable when.
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Old December 17th, 2006, 09:56 PM   #14
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For the state of Illinois if you sell something via internet to someone in IL, they have to be charged sales tax. If I was in Ohio or another state, of course there's no sales tax. They're trying to make it a law though. You can either pay this online or by the monthly forms that get mailed to you(not sure the name). The best way to protect yourself is the obvious LLC. Which is like $325 in IL? Not sure.

btw. A sale is a sale, you'll be required to pay all sales tax on any product you vendor out in illinois. People have to keep in mind the service is already completed. If you sell a finalized product, it has to be taxed(i hate the irs...go aaron russo)
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