Selling in volume regarding taxes.

[BobC]

Sorry I didn't see this thread sooner or I would have weighed in at the start. Bill T. has done a great job of explaining some of the rules regarding hobby versus business treatment of selling cards. Based on some of the questions and comments made in the thread though, I'm not sure everyone has a real good understanding of what Bill was trying to explain. I wanted to add a few things for clarification and practical consideration.

The rules for determining if an activity is considered not-for-profit (ie: a hobby) are generally covered under IRC Section 183. As Bill T. stated, the specific things the IRS looks at are not always yes or no answers and they will look at all the factors in making their determination of business vs. hobby. Included in this code section is a test the IRS relies upon in their determination process that is commonly referred to by tax professionals as the "Hobby Loss Rule". SImply stated, it is presumed by the IRS that you are engaged in an activity for profit (ie: you are a business and not a hobby) if you made a profit in at least three out of the past five years. The IRS can/may still look at the other factors in their determination but, the fact that an activity meets this test means the IRS will generally not challenge the reporting of that activity as a for-profit business.

The implications of that determination can be both good and bad for someone selling cards to "just support their hobby". If I had a dollar for everytime I heard that comment come from people on this forum, I'd probably be able to afford a T206 Wagner. So if you consider yourself as just being in a hobby and therefore report you gross profit from selling cards as Other Income on Line 21 of your federal 1040 tax return, that should be fine. However, if after five years you reported a taxable profit on your 1040 return from your so-called hobby in three or more of those years, under the "Hobby Loss Rule" I mentioned above, the IRS presumption is that you are engaged in a for-profit business and not a hobby. The service can still look at the other factors to make a final determination but, most of you aren't going to like the answers. Included in the list of other factors the IRS looks at are questions like:

Do you have the knowledge to run this activity for profit/as a business?
Do you ever change methods of operation to improve profitability?
Do you expect to make a profit from future appreciation of assets in the activity?
Do you put in the time and effort to this activity expecting to make a profit?

Most of you would likely have to answer yes to these questions. Heck, the statement that most of you make saying you sell cards to fund buying other cards is a clear indication you're out to make money on the cards you do buy and then sell. So in the IRS' eyes, a lot more of you could end up being in a business than in a hobby than you would ever guess.

To recap the major good and bad points of being in a for-profit business vs. a hobby are:

Good:

1) You can claim all ancillary and other related costs to carrying on the business (not just the direct cost of goods sold) as deductions on your 1040tax return as a Schedule C activity, or if you set up a formal entity, through a partnership, S-Corporation or regular corporate tax return.

2)