Turning my hobby into a "side buisness" for tax advantage

[hey101]

Some great advice on here. Besides what has already been mentioned, you would be wise to set up an LLC or other structure (s-corp, c-corp) to separate your personal assets from the liability of the business.

You file separate taxes. Separate checking and credit cards.

you need an EIN. If you don’t know what that is, then you are most certainly not ready to set up a business.

It’s not just a question of income and expenses. Don’t forget about depreciation. The first few years I ran my business, and did my income expense report at the end of the year, thinking I had made a profit and sent it off to my CPA … the depreciation on assets put me into the Red.

We were just really starting to turn a profit… And then Covid hit. Income dwindled. I had a discussion with my CPA as we had been in business for five years and we decided to force a profit by not taking quite a few expenses.

Here in California, you pay an $800 annual franchise fee whether or not you make a profit or loss. You have to make annual statements to the franchise tax board. I’m sure other states have similar types of requirements.

If you are not prepared to do all of those things, then it is a hobby.

[hey101]

@OverandOnward

When a hobby becomes a business, it can change the nature of one’s interaction with it. It can become work, not so much a hobby any more. With pressure to perform, to meet deadlines, to accomplish specific things. And much of the hobby-ness of relaxation and diversion may not be so enjoyable any more.

Read this statement. Then read it again. And then read it one more time. This is exactly how I feel about Horses now.

[clanter]

@hey101

You file separate taxes. Separate checking and credit cards.

yeah our horse even had its own credit card that its expenses were charge to, she use it also take her groom out for lunch once a week

[Baybear]

It is confusing because you see a lot of amateur/owners and some Jr hunters owned by an LLC which I imagine has some tax benefit but also means that if the horse damages someone/something then the owner’s protected from personal liability.

[SusanO]

Actually not true about personal liability. I am not a lawyer but talked to a managing partner of a large law firm during a CPA CPE session and asked that question. His answer is that LLC’s are great for contract law but not for torts. So if an LLC goes broke and can’t pay its obligations, then it is only at risk for the money paid into/ earned by the LLC. But if a person runs a business and is negligent or their vehicle, animal, employee injures another person then the owner of the LLC can be sued just like any other individual.

I know lots of people that have structured their farms as an LLC thinking they cannot be sued. Not true. Better to carry extensive personal liability insurance if you are high net worth. I am sure there are some tax advantages to being an LLC but since I am not a tax person I will not expand on that. I will let the tax lawyers explain that.

[clanter]

@SusanO

I know lots of people that have structured their farms as an LLC thinking they cannot be sued.

we set our farm up as a C Corporation, we were just shareholders of the farms stock

[OverandOnward]

Not a tax lawyer, or CPA … just a business person with some experience.

Individuals who want to use an LLC to shield themselves from liability are advised that the shield isn’t perfect in all circumstances. But, an LLC can be helpful in many legally adverse circumstances, especially for enterprises that are customer-facing on a regular basis.

If a contractor or employee of the LLC, driving on the public road in a truck owned by the LLC, has an accident with significant damages/injury/death, the idea is that the victim can sue the LLC, not the owner, and damages stop with whatever belongs to the LLC. And possibly sue the driver. The personal assets of the owner/chief officer of the LLC aren’t touched. That’s the idea.

But of course there are many complicated circumstances that could put the owner’s personal assets within reach as well. Many kinds of complicated mishaps and misadventures can occur on a farm.

The bottom line of any lawsuit, anywhere (in the U.S.), is that it doesn’t have to be reasonable or rational for it to happen. Someone just has to file it. It may not go far if it isn’t reasonable or rational – but it’s out there, and it has to be dealt with.

One of the most important protective parts of the “at your own risk” state liability shield laws, as well as the signed waivers, and the LLC’s, is the impression on the minds of the participants. Those things convince them from the get-go that they won’t be able to sue. It’s not true the no lawsuit could ever be filed, but if they think it is, that in itself can forestall a lawsuit.

The other side, one of the most dangerous parts of the ‘protection’, is that owners sometimes believe in it as well. And aren’t smart about the real basis of all protection – don’t do dumb sh!7. Don’t allow unsafe conditions to be normal. Some owners do unsafe dumb stuff, and they do allow unsafe conditions to be normal. That swings the door open wide against them, legally. If they have too much belief that they are immune from lawsuits and judgments against them, some are careless about it.

[clanter]

@OverandOnward

The bottom line of any lawsuit, anywhere (in the U.S.), is that it doesn’t have to be reasonable or rational for it to happen.

the US needs what in England and Wales is called the English Rule, where the losing party in a lawsuit is typically ordered to pay the legal costs of the winning party, I believe that would stop many of this suits

I was sued in a wrongful injury case where I had nothing to do with what happened other than service the piece of equipment, I spent $25,000 defending myself before the judge dismissed the case against me with prejudice

[Displaced_Yankee]

@Baybear

It is confusing because you see a lot of amateur/owners and some Jr hunters owned by an LLC which I imagine has some tax benefit but also means that if the horse damages someone/something then the owner’s protected from personal liability.

Putting your hobby into an LLC doesn’t make it tax deductible. Expenses for your hobby aka hobby losses are not deductible. Hard stop.

Forming an LLC has ZERO bearing on tax (with one small caveat, below). It is a legal entity, not a tax entity. A single-member LLC is literally called a ‘disregarded entity’ in tax. The taxpayer and LLC are one in the same.
Some reasons for forming an LLC include:

• limited liability (limited as @SusanO and @OverandOnward described very well).
• Anonymity: I can give out my LLC name and EIN instead of my SSN for 1099’s, etc. Public records (at least in NC) only need to list the registered agent, which may be a lawyer.
• Having a trade name and brand recognition. “Ponysaurus CPA Services LLC” is more catchy than “Displaced Yankee, CPA”
• Forming an organization of more than one person that explains how and when profits/losses/contributions are allocated. What happens when someone wants to leave that organization or maybe they want to add another member? There needs to (well should be) a document outlining that process. What if they just want to dissolve the who thing? How are assets divided?
• In the horse world you see this with multiple people going in to buy a horse for a BNT. The public doesn’t know who funded BNT’s horse.

My caveat from above: people get into trouble by forming LLC’s with multiple members. If there is more than one member (see single-member LLC above) then the IRS is expecting a partnership business return. Two friends forming a jewelry business together in an LLC means additional reporting, tax prep fees, etc. I do this tax return every year to report their $500 of net income. But they formed an LLC so we will keep them compliant.

But LLC does not move the needle tax wise.

[Baybear]

Thanks for the additional information. And can I just vent about these popups on this website…

[clanter]

@Baybear

And can I just vent about these popups on this website…

load Privacy Badger it is a free ad blocker, I did that at the suggestion of another poster on this forum, currently blocking 13 tracker/ads on this page for me… it just shows a line saying “advertisement” that I can click on to see the ad if I desire

And now there will be those who say the ads pay for the site, well without people viewing the site they can not sale ad space so me just visiting the site is helping the owners

[Montanas_Girl]

In addition to all the excellent points that have already been made, think about the transportation issues that would be involved if you became a “business”. Depending on the size of your rig and where you are located/traveling, you may need a CDL to haul your business-owned horse. Additionally, your personal auto insurance will likely not cover you when you are driving for business purposes.

[hey101]

@Displaced_Yankee

My caveat from above: people get into trouble by forming LLC’s with multiple members. If there is more than one member (see single-member LLC above) then the IRS is expecting a partnership business return. Two friends forming a jewelry business together in an LLC means additional reporting, tax prep fees, etc. I do this tax return every year to report their $500 of net income. But they formed an LLC so we will keep them compliant.

I certainly understand it’s not your position to advise your clients whether they do or do not form an LLC (and sounds like too late now) but I am actually curious why they did for such low revenue and as you mention all the extra business and tax prep fees.

I formed an LLC years ago for my Horse business and a separate LLC for a rental property I have because there are a lot of liability situations in both of those scenarios. But I have a friend who has just started her own jewelry making and tie-dye dress enterprise. She’s doing great, small time at the moment, probably no more than $3-5000 a year in profit selling at festivals and word-of-mouth on social media. I advised her to stay private for now as there is literally no liability in selling a dress or pair of earrings at a festival and why pay all the business franchise fees and extra tax prep.

If I’m wrong I would love to become more educated by others on this thread- this stuff greatly interests me!

[Displaced_Yankee]

@hey101

I certainly understand it’s not your position to advise your clients whether they do or do not form an LLC (and sounds like too late now) but I am actually curious why they did for such low revenue and as you mention all the extra business and tax prep fees.

It was already done and only informed us when we were preparing one friend’s personal tax return for the April 15th deadline. I can’t remember if someone told her they needed to form one or she just thought she had to. Maybe she spent too much time on LegalZoom.com. We just saw a note with income and expenses in her personal tax file about her new business that she splits with her friend named “Betsy & Boo-Boo’s Jewelry LLC”. Queue the follow up questions from us, checking the state company registry, etc.

So we informed her that “well this means XYZ and we need to do ABC” and she said that was fine. They are trying. I just don’t think that they realize all of their expenses and low margins.