# U.S. Tax reporting for Pen Hobbies



## lyonsacc (Jan 22, 2013)

Everyone here at IAP has been a great help with this wonderful pen turning addiction :biggrin: thing going on in my life. So, I thought I might try to share a little of my knowledge from the work I do that helps pay for pen kits and blanks.


My wife :beauty:and I :clown:are both CPAs and have had our own little practice for about 17 years now. I deal mainly with small businesses and my wife deals mainly with individuals, but many times those things mix. 


Disclaimer - This is an opinion piece:redface:; *ask your tax advisor :glasses-cool:for specifics regarding your situation*. Just like a CA finish, there is more than one way to do things and there are varying opinions among tax pros as to how to handle many situations. Any advice in the thread is NOT comprehensive. Commenting on this thread does not create any form of legal or client relationship. The IRS has rules, but there are exceptions and additions to the rules that would be impossible to cover in a thread like this. As well, I won’t help you cheat the system. Oh, I don’t know squat about taxes in most other countries, so sorry to the great people up north, down under, and across the pond!



That being said, I want to bring up 2 or 3 questions/issues that this pen turning hobby/business can create:


*1)* Technically if you sell (or barter) a pen, you have to report that as income on your tax return. The problem is how or where should it be reported. (Gifts – such as those that occur during PITH are not a taxable event, but prizes won are taxable events)

*2)* One BIG question is if you have a HOBBY or a BUSINESS. Like most things in the US tax code, these words have definitions in the tax code that don’t necessarily match what Mr. Webster would say.

*3)* What can you deduct? (I only touch on this a little bit here)




*As a simple example*. Let’s say you have sold one pen for $50. You spent $15 on the pen kit and $5 on the blank. You had no other expenses during the year (just to keep things simple).


If you have a HOBBY, the $50 gets reported as income on the front page of your tax return (usually line 21 of Form 1040). The $20 of expenses get deducted on Schedule A – Itemized Deductions on line 23 – Other expense. The problem with this is that line 23 (Schedule A) is in a section in which your expenses have to exceed 2% of your Adjusted Gross Income (AGI - Line 37 Form 1040) before you can deduct anything. So, let’s say you have AGI of $50,000. To get a deduction from line 23 on Schedule A the expenses have to be more than $1,000 (2% of $50,000) before you can get a deduction. If your expenses added up to $1,010 then you would get to deduct $10. :hypnotized: Oh - you only can deduct hobby expenses up to your hobby income. Treating something as *a HOBBY usually stinks*.



So, what does it take for something to be a BUSINESS rather than a HOBBY?


A statutory safe harbor is provided that, if met, causes a presumption that an activity is a for-profit endeavor. If the safe harbor is not met, the taxpayer must establish a profit motive using 9 subjective factors mentioned later. *To meet the safe harbor, a pen making activity must generate a profit in at least three of the five years ending with the tax year in question*. If the safe harbor is met, the burden of proof for lack of profit motive is shifted to the IRS 


Many people say they lose money with pen turning, but *I suspect that many of you could treat this as a BUSINESS for tax purposes*. 


*Not all of your expenses are tax deductible - which can be a good thing*. Let’s say you make 10 pens this year. Of those 10 you keep 3, you give away 4, and you sell three. You are only able to deduct the expenses associated with the 3 pens you sold. So, you might have spent $100 ($10 each) on pen kits, but you can only deduct $30 (3 kits x $10) for tax purposes. Adding to this example, let’s say that you have $50 of other expenses (CA, sand paper, bandaids:smile-big: , etc.). Then, in my opinion, it would be reasonable to also deduct 30% (3 out of 10 pens) of the $50 – which would be $15. 


So, to recap, you have spent $150 ($100 on pen kits and $50 on supplies) and you have sold 3 pens (for a total of $100). On paper – and in your spouse’s opinion :giggle:– you have lost money. However, in the IRS’s mind you have created $55 of taxable income ($100 of sales less $30 for pen kits and $15 for supplies). That is a profit. As a “BUSINESS” your business income and business deductions all go on Schedule C. Which usually results in less tax.



If you don’t meet the safe harbor rules to be a BUSINESS rather than a HOBBY (profit in 3 of 5 years), then there is a 9 part test established by regulations:

1) Do you have a profit motive, do you keep complete records, do you market/advertise?
2) Do you have expertise in this business (or retain advisors)?
3) How much time and effort is involved?
4) Is there a reasonable expectation of appreciation?
5) Has the taxpayer previously turned around an unsuccessful business?
6) Has the activity previously generated significant profit?
7) Are the profits substantial compared to the losses?
8) Is the activity meaningful to your overall income?
9) Does profit outweigh the pleasure element?


Opinions vary as to how many of these questions need to be answered positively to create a BUSINESS versus a HOBBY. Some might say just one or two of these needs to be answered yes. It really depends on the circumstances. 



Now, keep in mind that if you have profit of more than $400 you have to pay a thing called the self-employment tax which depending on your circumstances and what year it is could range from 2.9% up to 15.3% of your profit.




*The key parts are:*
*1) If you sold or bartered a pen, it is a taxable transaction in the eyes of the IRS.*
*2) Do you have a HOBBY (usually not a good thing for taxes), or a BUSINESS (usually a good thing for taxes)?*
*3) Even though you spent a BUNCH of money during the year – not all of it is necessarily a tax deduction.*


Sorry for this being such a long post. 

Please feel free to comment and ask questions. I’ll try to answer. Please do not include personal information in your questions. Please keep your opinions about the tax code or politicians in check.

Thanks!
Dave Lyons


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## thewishman (Jan 22, 2013)

Thank you, Dave!


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## ashaw (Jan 22, 2013)

Dave
Thank you for bringing light to this.  I been doing this for 7 years as a business and do not have to tell you about the record keeping.  In additional the local tax is reported in millage and requires only gross income no expenses.  Also if you keep x amount of inventory you have an inventory tax.  Lucky it takes me about a month to do my taxes.


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## walshjp17 (Jan 22, 2013)

Thanks, Dave.  You've certainly laid out the issues clearly.  Now I just need to decide IF I ever want to sell pens, how high I need to price them to make sure I can balance income with outgo to file as a business :biggrin: rather than a hobby.

Not sure I want to get into that whole 'self-employment' tax thingy now that I am retired and no longer employed, self- or otherwise.:wink:  I guess my dream of having the pen-making hobby pay for next year's :island:is out of the question.:tongue:


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## Leatherman1998 (Jan 23, 2013)

So what about me, for my age (15) do I have to mess with taxes?

Remember if you outgo exceeds your income, your upkeep will be your downfall.

Levi Woodard
Woodardwoodworks.com

Sent from my Galaxy player using Forum Runner


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## lyonsacc (Jan 23, 2013)

Leatherman1998 said:


> So what about me, for my age (15) do I have to mess with taxes?
> 
> Remember if you outgo exceeds your income, your upkeep will be your downfall.
> 
> ...


 
Levi, 

Sorry to say this, but you may have to deal with a tax return.  It really depends on your circumstances and how much business activity you have. Most children don't have to file a return until they earn more than $5,950 from a job or $950 of investment income (those amounts are for 2012).  HOWEVER, there is a pesky thing called the self employment tax that can hit people of most any age with a business (and some hobbies) if the profit for the year is more than $433.  So you may not have to pay income tax if your profit is under $5950, but you may have to pay self employment tax.  

Also something to think about - I see you have a website.  If you receive payments from people through paypal or a credit card, then the credit card company or paypal MAY send you a 1099-K showing how much $ they processed for you.  I don't remember of the top of my bald head, but I think it is either after $10,000 or $20,000 that they send those out.  If you get a form like that, then he IRS will treat that amount as taxable income unless you file a return that shows otherwise.  

By the way, I used the word "children" earlier in this reply.  That word has a specific definition in the tax code (it actually has a few specific definitions in the code) which is why I used it.  I didn't use it to belittle you. I am quite impressed by your deisre at a young age to work and earn some extra cash.  My daughter is attempting something similar and is the main reason we got into pen turning earlier this year.

Dave


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## Smitty37 (Jan 24, 2013)

*Technically -----*

What Dave says is true - practically, most of it doesn't really matter for most people here.

If you are selling a half dozen $25/$50 pens a year and you report any income at all from it the IRS is not likely to audit your return to make sure you have put all the right stuff in the right place.

If you file a Schedule C the IRS will probably take your word for it that you are a for profit business....unless you do file a loss too many years in a row.


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## scoobiehome (Jan 24, 2013)

Thank you for the information!
Renee


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## Leatherman1998 (Jan 24, 2013)

Thanks, I know I did NOT make over $400 this year. Next year...   What would I have to keep records on? I am guessing I would need to keep a record for total income, profit, and cost of supplies.

Levi Woodard
Woodardwoodworks.com

Sent from my Galaxy player using Forum Runner


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## LL Woodworks (Jan 24, 2013)

*Booth & Hotel Costs*

Are booth costs and hotel expenses to participate in shows considered costs incurred to make  $XXX  profit?


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## Smitty37 (Jan 24, 2013)

LL Woodworks said:


> Are booth costs and hotel expenses to participate in shows considered costs incurred to make  $XXX  profit?


Yes...also part of some (maybe all)your meals away from home might be deductable.


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## Smitty37 (Jan 24, 2013)

Leatherman1998 said:


> So what about me, for my age (15) do I have to mess with taxes?
> 
> Remember if you outgo exceeds your income, your upkeep will be your downfall.
> 
> ...


It might or might not .... *if* you are living at home and are a dependent on your parents tax return and are not legally old enough to enter contracts on your own, your parents might be responsible for everything you do - they might be responsible to pay for the things you buy and taking care of any returns, etc for what you sell.  

In that case your parents might have to file the business as theirs and report it on a Schedule C (or as a hobby business) on their return.   But you or your parents do need to get some advice from someone familiar with the laws in your state.

My children all had "business" income from their 4 H projects but I always put their income and expenses on my Schedule F - I don't see much difference here.


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## ed4copies (Jan 24, 2013)

The difference CAN be significant, if your parents make a very good living.

YOU would be taxed at the lowest possible rate (on profit), if at all, your parents could pay 39% more to the feds and 8% more to the state, so someone (you or them) would lose 45 cents of every dollar you earned, compared with you filing.


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## Smitty37 (Jan 24, 2013)

ed4copies said:


> The difference CAN be significant, if your parents make a very good living.
> 
> YOU would be taxed at the lowest possible rate (on profit), if at all, your parents could pay 39% more to the feds and 8% more to the state, so someone (you or them) would lose 45 cents of every dollar you earned, compared with you filing.


 That could happen - it's a dicey area because it can look to the IRS like the parents are trying to shift income to the son to reduce the total tax bill.....the IRS folks don't like that either.

What would concern me is whether or not he CAN be the operator of a business if, due to his minority status, he can't enter contracts.  For instance can a minor set up to accept credit cards?  I don't think so.  Can a minor own a paypal account that accepts payments for goods sold?  Those things involve contracts and usually a contract entered in with a minor is not valid and can't be enforced.


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## ed4copies (Jan 24, 2013)

Which leads us to the conclusion:

Talk to a qualified accountant, in your area!!!​


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## Leatherman1998 (Jan 24, 2013)

you guys are making this so much fun.   Thanks for all your help I would rather know and work on it that have an IRS man at my door some day.


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## lyonsacc (Jan 24, 2013)

Age isn't an issue as long as the child truly performs the work/earns the money.  Sometimes it is easier to put the income/profit on the parents return eventhough it may cost a little more in taxes.  The IRS does not like income shifting (parents shifting their income to the kids in order to pay less tax).

There used to be a local car dealer that always had his babies/kids in his commercials.  Ever wonder why?  He was able to pay them a handsome "modeling" fee.  Effectively shifting a significant amount of income to his kids.  That was long enough ago that now his kids run the dealerships.


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## ed4copies (Jan 24, 2013)

lyonsacc said:


> Age isn't an issue as long as the child truly performs the work/earns the money.  Sometimes it is easier to put the income/profit on the parents return eventhough it may cost a little more in taxes.  The IRS does not like income shifting (parents shifting their income to the kids in order to pay less tax).
> 
> There used to be a local car dealer that always had his babies/kids in his commercials.  Ever wonder why?  He was able to pay them a handsome "modeling" fee.  Effectively shifting a significant amount of income to his kids.  That was long enough ago that now his kids run the dealerships.




So, have the kids been sued by SAG (Screen Actors Guild) for perfoming without belonging to the "Guild"???:biggrin::biggrin::biggrin:


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## lyonsacc (Jan 24, 2013)

The booth fees should be deductible.  Meals and travel might be.

For local shows: the travel would be deductible (probably just the local mileage). The meals would not be - unless you had a legitimate business discussion with another vendor.

For non-local shows:  A non-local show is one that you have to stay overnight to attend.  The IRS does not give any guidelines as to how far away from your home that is.  Meals and travel - some or maybe all.  Here is an example:  If you travel for 7 days - 4 at a show and 3 visiting family: then, since a majority of your time involved business you can dedcut the trip back and forth, you can also deduct the meals and lodging for the 4 business days, but not the meals and lodging for the 3 personal days.  If you reverse that (4 days personal and 3 days business) then you do not get to deduct the trip back and forth because the majority of the trip was personal, but you can deduct the 3 business days.

There is more to that topic, but that is the general idea.


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## lyonsacc (Jan 24, 2013)

Keep in mind things need to be reasonable.  There is a local tax speaker that always starts his conferences by saying "pigs get fat, hogs get slaughtered"


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## mtgrizzly52 (Jan 25, 2013)

First of all, thanks for the great information Dave. I've asked my accountant similar questions and he just shrugs his shoulders and says don't worry about it. By the way, if I can convince my wife (who was a co-worker of his) I will be getting a new accountant.

Question....I'm aware of the travel expenses issues from being on the road for 42 years in my job, but what about the tools and equipment you have to buy to make the pens as well as the supporting cast of tools to support the making of the cast? I've had to replace several major tools this past year due to a flood in my basement, and even the insurance took care of most of the cost, I still had out of the pocket costs as well. In you opinion, would these be deductible as well?

Thanks again

Rick (mtgrizzly52)
<img id="ums_img_tooltip" class="UMSRatingIcon">


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## Smitty37 (Jan 25, 2013)

mtgrizzly52 said:


> First of all, thanks for the great information Dave. I've asked my accountant similar questions and he just shrugs his shoulders and says don't worry about it. By the way, if I can convince my wife (who was a co-worker of his) I will be getting a new accountant.
> 
> Question....I'm aware of the travel expenses issues from being on the road for 42 years in my job, but what about the tools and equipment you have to buy to make the pens as well as the supporting cast of tools to support the making of the cast? I've had to replace several major tools this past year due to a flood in my basement, and even the insurance took care of most of the cost, I still had out of the pocket costs as well. In you opinion, would these be deductible as well?
> 
> ...


It depends - Tools used in your business can be deducted or set up for depreciation to the extent of their business use.  You probably can't claim any loss due to the flooding unless you had previously claimed the tool as used in the business.  You might be able to claim a section 179 deduction on new tools bought for the business.


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## Smitty37 (Jan 25, 2013)

lyonsacc said:


> Age isn't an issue as long as the child truly performs the work/earns the money.  Sometimes it is easier to put the income/profit on the parents return eventhough it may cost a little more in taxes.  The IRS does not like income shifting (parents shifting their income to the kids in order to pay less tax).
> 
> There used to be a local car dealer that always had his babies/kids in his commercials.  Ever wonder why?  He was able to pay them a handsome "modeling" fee.  Effectively shifting a significant amount of income to his kids.  That was long enough ago that now his kids run the dealerships.


It isn't age per se - it is who is responsible.   

A family owned business can use minors in the business and might or might not pay them wages for their services.  The IRS frowns on using this feature to "shift" income from higher to lower income tax brackets.  Due to the 15% plus self employment tax it might cost more for the business income going to the child than if claimed by the parents.


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## lyonsacc (Jan 25, 2013)

mtgrizzly52 said:


> First of all, thanks for the great information Dave. I've asked my accountant similar questions and he just shrugs his shoulders and says don't worry about it. By the way, if I can convince my wife (who was a co-worker of his) I will be getting a new accountant.
> 
> Question....I'm aware of the travel expenses issues from being on the road for 42 years in my job, but what about the tools and equipment you have to buy to make the pens as well as the supporting cast of tools to support the making of the cast? I've had to replace several major tools this past year due to a flood in my basement, and even the insurance took care of most of the cost, I still had out of the pocket costs as well. In you opinion, would these be deductible as well?
> 
> ...


 

Rick, you have a couple issues going on here.

First, the flood and insurance issue. It could take me over an hour to write up all of the possible scenarios . . . Anyway, if the previous equipment had been claimed/deducted as business equipment, then you could currently deduct/depreciate the cost of the new equipment less the amount you received from the insurance. If the insurance gave you more than the remaining tax basis of the old equipment and the cost of the new equipemnt, then you may have taxable income from the extra the insurance company gave you (sorry that sentence is a bit technical). 

If the previous equipment was not claimed on your taxes then the insurance proceeds might (emphasis on might) be taxable if they gave you more than what you purchased the equipment for.

Second: Equipment. Like what Smitty said - you can deduct/depreciate/section 179/bonus depreciate the purchase of new equipment you use in your BUSINESS. If your business use of a new lathe is more than 50% you should be able to get a better deduction than if it is used less than 50% for business purposes. That might not be very helpful info, but it can be a bit complicated. One of these days I'll try to post something about depreciation.

Thanks,
Dave


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## John Pratt (Jan 25, 2013)

I find rule #9 for safe harbor a little funny.

9) Does profit outweigh the pleasure element?

To me it sounds like you should only do a job that you take no pleasure in or if you start to like your job to much, you shouldn't be able to call it work.

Some lucky few (myself included) were able to get a job/career/profession in my dream job. I actually look forward to going to work every day. However, I do tell people all the time that I get paid to do my hobby.


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## Smitty37 (Jan 25, 2013)

lyonsacc said:


> mtgrizzly52 said:
> 
> 
> > First of all, thanks for the great information Dave. I've asked my accountant similar questions and he just shrugs his shoulders and says don't worry about it. By the way, if I can convince my wife (who was a co-worker of his) I will be getting a new accountant.
> ...


Dave, for a very small business (like most of us here) don't you find that 179 is much easier to use than regular depreciation.  I sure have in my own case. I really don't depreciate anything and won't again unless I buy something for the business that is really expensive.


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## ed4copies (Jan 25, 2013)

If you collected ANY of the cost of the equipment lost in the flood, you would have had to say it was for personal use (homeowners insurance without a business rider).

Now, for tax purposes, you'd like to say it is for business use?

I smell audit!


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## lyonsacc (Jan 25, 2013)

[[/quote]Dave, for a very small business (like most of us here) don't you find that 179 is much easier to use than regular depreciation. I sure have in my own case. I really don't depreciate anything and won't again unless I buy something for the business that is really expensive.[/quote]

Smitty - yes, most of the time section 179 is the easiest/best option, especially for small businesses like most the the ones here at the IAP. It can be suprising sometimes to play around with the different depreciation methods and see unusual tax results (sometimes fewer deductions results in less tax).

BTW - thanks for all you do here at the IAP. Your knowledge and participation are highly valued.

Dave


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## Smitty37 (Jan 25, 2013)

ed4copies said:


> If you collected ANY of the cost of the equipment lost in the flood, you would have had to say it was for personal use (homeowners insurance without a business rider).
> 
> Now, for tax purposes, you'd like to say it is for business use?
> 
> I smell audit!


Ed, that isn't very likely for a couple of reasons unless he trys to claim loss to his business on equipment that had not previously been listed for business use. That would be a no-no and no reliable tax person would do it on a return they prepared.

 It is perfectly legal for him to claim that he placed the new equipment into business use (following the tax rules)this year.  How it was paid for will not enter into that choice only how much cost and when he placed it in business use and what percentage of the total use is business use.  Actually that can be done for used equipment too.  I have done it many time particularily when I operated my farm and always bought used equipment because I couldn't afford new.


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## Holz Mechaniker (Jan 17, 2015)

ed4copies said:


> Which leads us to the conclusion:
> 
> Talk to a qualified accountant, in your area!!!​




EXACTLY!!!!!!


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## TimS124 (Jan 17, 2015)

Dave,

If the example $50 pen was made from a kit and blank that were both purchased in a prior year, are the kit and blank still deductible or did they have to be dealt with in a prior year?

Let's say the kit and blank were bought in early 2013 and made into the $50 pen in mid-2014.  Is that any different than if the kit and blank were bought in early 2014 and used in the same year (but in a different quarter)?

Many of us have spare blanks on hand and it would be handy to know how those issues affect materials acquired prior to starting to sell (i.e.: once we've gotten good enough to transition from making gifts to making sales).

Thanks for this thread - your info (and several other contributors) are very educational!


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## Smitty37 (Jan 17, 2015)

*Don't fear the tax man*

The best advice a small business person can receive is do not be afraid of the tax man.  Take a few simple steps and you will probably never have him knocking at your door.

If you don't know whether or not you have a business or a hobby business, you probably have a hobby business.  I used to tell my tax customers - if you are co-mingling business and personal income - you probably have a hobby business.

If you want it to be a real business treat it like one.

1. Get a business license if your Locality issues them.
2. Keep business income and expenses completely (and I mean completely) separate from personal.
3. Keep accurate records of income and expenses for the business.
4. Be very careful if you claim business use on normal home expenses like electricity, water etc. The amounts the government will allow if you are audited on them is very small and probably not worth the bother.
5. If you are claiming a separate workshop as exclusively used for business make sure that it is.

Now, having said all that, you should keep in mind, that whatever you claim, you are not likely to face an audit of your schedule C. and, if you do they are not going to lock you away for the rest of your natural life.

I have claimed a small business (also a small farm for 39 years) for most of the 60 plus years I have been filing income taxes and have never had an audit on either.  My business for years was personal income tax preparation where I did quite a few scedule Cs and never had one of them audited either.


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## Quality Pen (Jan 17, 2015)

I have been thinking, but how do we account for "breakage" as in I almost made a pen then ruined it or at a a show someone stole it.


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## Smitty37 (Jan 17, 2015)

Quality Pen said:


> I have been thinking, but how do we account for "breakage" as in I almost made a pen then ruined it or at a a show someone stole it.


That depends on whether you are a hobby business or a for profit business.  If you are a hobby business you don't do anything.  You can deduct only the cost of the items you actually sell.  There is probably a way to hide this if you want to cheat a little.  

If you are a business engaged in for profit where you buy raw materials and produce finished products.   It depends on how you account for in process inventory, and there are a number of methods for doing that. No one can really answer the question without knowing how you are accounting for your in process inventory.

I'm sure there are methods where you can set up breakage accounts to handle such things but determining the value can be tricky.....you can figure your labor and selling costs in when pricing but not when determining costs for finished inventory valuation.  In short the pen that you used $20.00 worth of parts to make and put in 4 hours labor and have some craft fair attendance costs -- you might want to sell for $120 but it gets stolen....you can only write off the $20.00 you have in the raw materials.  You're claiming the cost of show attendance elsewhere and you can not claim your own labor.


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## TonyL (Jan 17, 2015)

Dave's advice and the advice of others with experience properly accounting for their business activity is excellent.

Remember this:
A CPA may not know more than a non-CPA tax professional or even you, but a CPA with an active license is bound by certain codes which afford you certain rights in the event the CPA messes-up.

If the CPA won't sign your return, he may be concern about how you insisted that he prepared it. I am also a CPA, abd there were many returns that I would not sign and not because the audit risk was high (I didn't need any one or anything jeopardizing my hard-earned education and license).

There are two main "camps":
1. Prepare your return as aggressively as possible to minimize your liability with minimum exposure to an audit.
2. Prepare your return according to the tax code and if audited (for whatever reason, including a random audit), demonstrate that you have prepared everything according to the law which is easy when you do. 

The status of a CPA's licence is published by each state's department of education or office of the professions. You simple need to ask for the CPA's license number and which state he/she was awarded his/her licence. Some states have reciprocal licensing arrangement which accept the license from another states. 


An income tax audit stinks, but in my experience isn't close to the PITA that a sales tax audit can be. Make sure you are paying your sales tax (when required to) even if the vendor did not charge you sales tax. The burden to pay state sales rests with the consumer of the goods/services. If you bought a lathe from a Amazon or vendor that did not charge you sales tax, and the items is subject to sales tax in your state (just as if you bought it in your state), you must pay your state USE tax (same as sales tax).

I hope this helps.


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## lyonsacc (Jan 17, 2015)

Quality Pen said:


> I have been thinking, but how do we account for "breakage" as in I almost made a pen then ruined it or at a a show someone stole it.


 
Hey Bobby,

I'll share my story about this http://www.penturners.org/forum/f13/computer-chip-120349/ pen. For tax purposes I have a pen "business" - not a hobby.  Some one asked me to make this pen for them.  1st computer blank chipped out on me and was useless.  The 2nd computer blank was turned perfectly - then it rolled off my table and cracked when it hit the floor.  I tried to repair it, but the repair wasn't good enough.  The 3rd blank is what is in the picture.  The cost of all three blanks will be included in my "Cost of Goods" sold expenses on my tax return this year.  If I was making this pen as a gift for a friend, then none of it would be deducted this year.

If a pen is stolen at a show then your cost (what you paid for the pieces parts) can be deducted in the year it was stolen.  I lost a John U Pheasant feather pen this year.  I am not deducting it on my return - because I am still hoping I will find it. Also, if I did lose it, it would have been when I took it with me to use somewhere.  If I were aggressive in my tax prep I could probably deduct it since it is an item for sale, but I am not that aggressive (and I suspect I will find it when/if I ever clean my room) so I won't deduct that loss this year.

Dave


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## lyonsacc (Jan 17, 2015)

TimS124 said:


> Dave,
> 
> If the example $50 pen was made from a kit and blank that were both purchased in a prior year, are the kit and blank still deductible or did they have to be dealt with in a prior year?
> 
> ...


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## Smitty37 (Jan 17, 2015)

TimS124 said:


> Dave,
> 
> If the example $50 pen was made from a kit and blank that were both purchased in a prior year, are the kit and blank still deductible or did they have to be dealt with in a prior year?
> 
> ...


If you are a hobby business you deal with everything only in the year of sale regardless of when you bought it.  If you file a schedule C you deal with it differently depending on whether you are using the cash method or accrual method of accounting.

My personal opinion:  If it is only a few sales, I would simply report the net profit as other income and not bother with the incidental costs.  To do that you just subtract the cost of goods sold from the selling price.  Legal and simple.


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## TimS124 (Jan 18, 2015)

lyonsacc said:


> TimS124 said:
> 
> 
> > Dave,
> ...



Thank you.  That did indeed help quite a bit.

I was more interested in long shelf life items (like extra kits bought when there was a good sale or a batch of blanks purchased together but only some were used).  Thanks for the info and I can see where being consistent would be quite important.


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## TonyL (Jan 18, 2015)

In general, blanks that you intended to make a pen from and sell (that pen) are not deductible until the pen is sold. Until a blank is sold whether resold to another party or turned into whatever, it is considered inventory (an asset) and therefore, not deductible.
In general, inventory does not become a business expense until is sold.

If if are selling inventory (or making pens) purchased years ago, you can assign a value to it based on what you think it is worth (based on some external source) or what you paid for it (historical cost) when you purchased it. Usually the safest option is to use what you paid for it. Again, this is all in general.

Not that Dave needs me to validate his advice, but all that he has said agrees with my education, training, and experience. In fact, I don't actively practice tax prep, so I am sure Dave and his wife are better equipped to answer than I am.


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## smik (Jan 18, 2015)

As you fill out those taxes here's a little mood music .

https://www.youtube.com/watch?v=YtksJEj2Keg


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## Smitty37 (Jan 18, 2015)

TonyL said:


> In general, blanks that you intended to make a pen from and sell (that pen) are not deductible until the pen is sold. Until a blank is sold whether resold to another party or turned into whatever, it is considered inventory (an asset) and therefore, not deductible.
> In general, inventory does not become a business expense until is sold.
> 
> If if are selling inventory (or making pens) purchased years ago, you can assign a value to it based on what you think it is worth (based on some external source) or what you paid for it (historical cost) when you purchased it. Usually the safest option is to use what you paid for it. Again, this is all in general.
> ...


You are right that in general inventory is not an expense until sold but the way it is accounted for differs depending on whether you are a hobby business or a for profit business and also whether you use the cash or accrual method of reporting.  For a hobby business you're totally correct. You need not ever take a physical inventory of anything.  You can't write off obsolete, stolen or damaged inventory.

A Schedule C business using the cash method uses expenses the cost of inventory when paid for and it goes into the cost of goods sold....unsold inventory added during the year is then subtracted from the cost of goods sold on January 1st when usually you take a physical inventory.  It has the same effect but you need to take a physical inventory (there are some exceptions).  The inventory is carried forward every year.

Also, a Schedule C business can write off obsolete, damaged or stolen inventory and there are a number of different ways to do this.  

In some cases 1040C EZ will work for you and save you a lot of headaches...that is if your business is small enough, less  than $5000 in expenses and reporting a profit, but still qualifies as for profit.  I personally think many business are better off to go this route than as a hobby.  I don't think the IRS is likely to question you and you don't have to worry about inventory.


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## endacoz (Jan 20, 2015)

What do most people use to record all this in and our $$


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## lyonsacc (Jan 20, 2015)

endacoz said:


> What do most people use to record all this in and our $$


 
My suggestion would be whatever works best for you.  

1) Get a legal pad and use a different page for each "category" of expense you want to track.

2) Get a bunch of envelopes and label each one for different expenses, then collect your receipts in the envelopes - and add them up at year end.

3) Or put all receipts from 1 month in an envelope and at the end of each month add up the totals of the different types of expenses and write them on the outside of the envelope. That way you don't have a huge pile to deal with in January, just a few smaller ones.

4) Build an excel spreadsheet (my preference for my pens and small businesses) 

5) Software like Quicken that is a glorified check book will keep track of expenses for you.

6) If you are really serious and have a lot of activity try a bigger accounting software like QuickBooks.

I usually recommend people start with the simplest form that works for them, then to move up a step when that becomes too cumbersome.  I am slow to recommend accounting software to people.  For it to work correctly the user needs to have a decent understanding of how accounting works or you can create a bigger mess than you started out with.

I hope that answers at least part of your question.


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