Eliminating Schedule C -- Need Statement?

[TromboneAl]

After years of reporting huge annual profits of somewhere between $-100 and $100 on schedule Cs for my jazz playing and Lena's knitting, I've decided to no longer fill out these forms when doing my taxes.

My question is, do I need some kind of statement such as "we are now treating these as hobbies" or "These businesses are now closed?"

IOW, if the IRS computer sees a schedule C one year, and none the next, is it going signal for an audit?

 

[Lsbcal]

I don't know about the audit issue but this sounds like small potatoes to me and not worth the IRS's audit resources time. Just an opinion though.

Regarding making it a hobby, I'd worry about that a bit since as I understand it the IRS wants you to treat income from a hobby as taxable but you don't get to write off any of the costs like on Schedule C.

Why not just continue with Sch C ? Assuming you are using TurboTax it's all practically automatic anyway.

 

[Lsbcal]

Forgot to mention we actually did this about 14 or so years ago. We just stopped filing the Sch C. No audit.

Recently DW started selling artwork so we went the full small business route again: city license, sales tax, state & federal filing. DW is not using her old business filing stuff, it's all new. Once this is set up it seems the yearly filings are just minor adjustments to last year's. With all this done on computers it's neater and easier.

 

[W2R]

After years of reporting huge annual profits of somewhere between $-100 and $100 on schedule Cs for my jazz playing and Lena's knitting, I've decided to no longer fill out these forms when doing my taxes.

My question is, do I need some kind of statement such as "we are now treating these as hobbies" or "These businesses are now closed?"

IOW, if the IRS computer sees a schedule C one year, and none the next, is it going signal for an audit?

I have no idea, but I'd suggest not listing your occupation as "musician" or hers as "knitter". Just say "retired".

 

[Moemg]

IOW, if the IRS computer sees a schedule C one year, and none the next, is it going signal for an audit?

I doubt it with the small amounts you were claiming .This is the first year the IRS are going after ebay sellers who sell more than $20,000 so they have their hands full .

 

[Animorph]

2011 was my first year without Schedule C after a couple of years with it. Turbo Tax didn't make anything of it. However I didn't have any income, not the same as converting to a hobby status.

 

[Onward]

My question is, do I need some kind of statement such as "we are now treating these as hobbies" or "These businesses are now closed?"

I've never heard of any such form. Your return will make it clear you're now treating it as a hobby. Hobby income on 1040 line 21, and hobby expenses on Sched A.

as I understand it the IRS wants you to treat income from a hobby as taxable but you don't get to write off any of the costs like on Schedule C.

You can write off hobby expenses, but only up to the amount of hobby income. So you don't get to write off any net loss on your hobby, as you can on a business.

 

[TromboneAl]

I don't know about the audit issue but this sounds like small potatoes to me and not worth the IRS's audit resources time. Just an opinion though.

Regarding making it a hobby, I'd worry about that a bit since as I understand it the IRS wants you to treat income from a hobby as taxable but you don't get to write off any of the costs like on Schedule C.

Why not just continue with Sch C ? Assuming you are using TurboTax it's all practically automatic anyway.

Thanks.

I guess my (probably unreasonable) concern is whether the IRS computers are programmed to recognize small potatoes. A human will say "It's only a few bucks." But a computer may say "Gong, Gong, warning -- discrepancy detected!" I have PTSD when it comes to the IRS or DMV.

I go through this every year, and usually end up doing the Sched C. But it's a bother because I do the mileage, and have to keep track of all the tips, etc. Also, if I deduct the $1,000 per year for piano lessons, I'm definitely never going to make a profit.

 

[Lsbcal]

Thanks.

I guess my (probably unreasonable) concern is whether the IRS computers are programmed to recognize small potatoes. A human will say "It's only a few bucks." But a computer may say "Gong, Gong, warning -- discrepancy detected!" I have PTSD when it comes to the IRS or DMV.

I go through this every year, and usually end up doing the Sched C. But it's a bother because I do the mileage, and have to keep track of all the tips, etc. Also, if I deduct the $1,000 per year for piano lessons, I'm definitely never going to make a profit.

Well we've got to have something to do in retirement. I don't take all those IRS regulations on record keeping very seriously. We just keep the Visa statements and do not keep some sort of diary with car mileage logs. Just counting on being a little spud.

I don't think you can have too many years in a row (3?) where you have a business loss. One can always reduce the deductions to show a minor profit.

 

[TromboneAl]

I don't think you can have too many years in a row (3?) where you have a business loss. One can always reduce the deductions to show a minor profit.

Technically, the rule is that you have to make a profit 3 out 5 years, but if you run it like business, etc., you can get around that. Also, I think that rule would make GM or Ford a hobby sometimes.

But it is definitely illegal to reduce your deductions -- you must take every deduction you are entitled to.

 

[Lsbcal]

...(snip)...
But it is definitely illegal to reduce your deductions -- you must take every deduction you are entitled to.

Didn't know that. So if I have some material costs, I have to take all those costs as a deduction and cannot leave some of it off so as to pay a higher tax? Of course, most everyone wants to max deductions.

 

[TromboneAl]

Didn't know that. So if I have some material costs, I have to take all those costs as a deduction and cannot leave some of it off so as to pay a higher tax? Of course, most everyone wants to max deductions.

Yes, that's exactly right. One reason is that, as with the business/hobby thing, you might want to adjust your net income to get you into some particular situation.

Of course, there are gray areas. I went to a gig and also bought some food at the grocery store. How much of the mileage is for the gig?

 

[farmerEd]

I have dropped schedule C businesses 3 times in my life (actually two Sched C's and one Schedule 'F' (farm). Never heard a peep from the IRS about it.

 

[Alan]

We did Sched C for 2 years and then stopped, no problems.

Simply recording your income as a hobby and not doing the Sched C will not trigger an audit. (not sure about the men in the black helicopters though).

 

[pb4uski]

Same here. DW has had small side businesses over the years for which we have filed Sch Cs but she stopped doing each so we stopped filing Sch Cs - never been asked boo about it.

 

[Nords]

My question is, do I need some kind of statement such as "we are now treating these as hobbies" or "These businesses are now closed?"
IOW, if the IRS computer sees a schedule C one year, and none the next, is it going signal for an audit?

What about state & locality taxes? Do you have to have a business license for any of this? Do you have to suspend/cancel the license if you stop filing the tax returns?

Hawaii requires an excise tax license for reporting income from (among other things) a rental property. If you stop renting out the property then you have to file to have the license suspended/inactivated or canceled. Otherwise you will get a query and a scolding.

 

[TromboneAl]

What about state & locality taxes? Do you have to have a business license for any of this? Do you have to suspend/cancel the license if you stop filing the tax returns?

Hawaii requires an excise tax license for reporting income from (among other things) a rental property. If you stop renting out the property then you have to file to have the license suspended/inactivated or canceled. Otherwise you will get a query and a scolding.

I don't think anybody in this county has a business license for playing music or selling knitted stuff at fairs, so I think I'm safe there.

In fact, even when I was selling my software, I only needed a fictitious business name license.

 

[Lsbcal]

What about state & locality taxes? Do you have to have a business license for any of this? Do you have to suspend/cancel the license if you stop filing the tax returns?
...

In California if you have a small business you should have a business license from the city and pay their fee of maybe $25. The good thing about a business license is you do not have to pay sales tax on the items used in the sale of your work e.g. paint and canvas if you are an artist.

If you just filed state & federal it might be that the city would have an agreement with the state to find this sort of thing out. Then they'd come after you with penalties. Then there is sales tax and the tax depends on where the sale was made (county in the state or multiple counties) -- a bit hazy on this since DW's gallery handles the sales tax and she just has to file with a zero tax owed. But she does have to file.

It took me some detective work to figure out what had to be done for our state/county/city and to get examples of how to fill out forms for DW's (very) small business. It would be nice if there was one place to go where government set up a simple step-by-step procedure to get the reporting info requirements. I think many small business people just ignore the whole thing or run to their accountants.

 

[harley]

Al, I think you might need to think about getting a job. You've got too much time on your hands. What do you think they're going to do if you don't report anything, check your lips or fingertips for calluses? It's the duty of the gov't to make the tax process as obscure and difficult as they possibly can, and it's the duty of the citizenry to pretty much ignore their anal retentive rule making and put in a tax filing that captures the spirit of your financial situation without worrying too much beyond that. If they question it you can pay the $5 adjustment and the $.75 penalty. Or if you're feeling pissy you can fight it for a while and make them waste dozens if not hundreds of tax dollars before paying the $5 adjustment and the (now) $1.25 penalty. You're not talking hedge fund money here.