| You raise some important issues. First,
you say this is a hobby. The IRS basically says hobby revenue
must be declared, but that related costs and expenses are not
deductible. Define the term "revenue" as the cash, and
market value of goods or services, you receive in exchange for your
merchandise (that's right, even the market value of bartered goods and
services received must be declared). Profit is what's left
over (if anything) after deducting costs and expenses.
If you want to deduct costs and expenses you need to file a Schedule
C with your 1040, showing all revenue, costs, and expenses related
to your for-profit going concern. Define the term
"for-profit going concern" to mean a business operating with
a profit motive and the intention to continue operating into
the foreseeable future. Even a part-time business can meet the
definition of a for-profit going concern and become eligible for
Schedule C treatment.
Individual costs and expenses may be subject to certain tests. Those
that pass such tests may be apportioned or limited by maximums
or percentages.
Whether your revenue-producing activity is determined by the IRS
to be a for-profit going concern or a hobby, the IRS says you MUST
claim the revenue on your 1040. The difference is whether the IRS
allows you to claim your costs and expenses to offset your revenue (and
that can be a HUGE difference).
To get more information, consult expert guides such as those prepared
by J.K. Lasser. You can also visit the IRS website at www.irs.gov
and click on the resources shown on this page and elsewhere on this website.
You may ALSO have to collect and remit sales tax within your state
taxation framework, in which case you may be required to get a state
sales tax certificate. Consult your state comptroller's website or
contact them directly for additional information. They may have an 800
number for you to call. They may also have a local office you can
visit.
Meanwhile, consider the following 3 rules:
RULE #3: Each taxpayer's situation is different. You should consult a
paid professional tax preparer such as a tax accountant, tax attorney,
or enrolled agent.
RULE #2: Always report all revenue you receive on your 1040, then
aggressively pursue all deductions to which you are legally entitled.
RULE #1: Free advice is often worth what you pay for it.
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