Are you a Hobby or Small Business - How your State Plans to Screw You.

Are you a Hobby or Small Business - How your State Plans to Screw You.

You may end up being a business to your city and state required to pay for licenses, collect sales taxes and file state profit/loss tax documents, but with the IRS declaring you as a Hobby if your business doesn't turn a genuine taxable profit within three out of your first five years.  

Think that sucks?  California is launching an ambitious campaign to nickle and dime all sellers within its borders that use the internet or phone apps to sell.  
So you're thinking, I am just selling junk from around my house, but in California in particular, if you are making a profit on those items then you are a Sole Proprietor once you sell three items within a year.  But you only made $100 in that year you say, California doesn't care, and lets take away the other excuses also, it doesn't matter if you had no sales directly to anyone in California, it only matters that you did the selling from California.

Recently the Board of Equalization who manages sellers permits, indicated on their website that they were sending out e-mails to online sellers who do not have a permit to sell in California.  Unfortunately in California, that $100 you made on eBay, Facebook or LetGo will end up costing you a minimum of $335 each year.  But you say, you only made $25 after shipping costs and seller fees and other expenses! Hah, say's that State of California and other states like it, because they go by the gross sales, not the profit, or in other words, they look at the total amount of money you received before shipping and fees and expenses and base your sales on that amount.

It becomes an even more complex issue when your state say's you are a business but the IRS says you are a hobby, because at that point, your expenses associated with being labeled a business by your state are no longer allowed as deductions by the IRS.

Here is a recent YouTube video discussing the State of California's efforts to hunt down sellers of any size.  BUT! make sure to check out the links to the articles by other websites included here for information to help you decide what steps to take next.



Check out these articles on other websites for useful information to help you decide if you are a small business or a hobby and what you can do about it.

REMEMBER - these are IRS rules. Your State has its own rules, and that's where the real problem exists.  The IRS sets clear and transparent terms and rules, however States like California have vague rules to nickle and dime its residents - with a statement the say's that any sales become a sole proprietorship after the third sale in a year, they use Garage Sales as their example, but take it farther when it comes to selling online at eBay, Etsy, Mercari, or wherever by suggesting that selling three pencils, three separate times in a year for 99 cents each is equivalent to those three Garage Sales where multiple sales occur with multiple dollar values within a single day.  

Don't Let The IRS Reclassify your business as a hobby. - Entrepreneur Article
https://www.entrepreneur.com/article/219233 

Do you have a Hobby, For Profit Hobby, or Business?
https://trustfile.avalara.com/blog/do-you-have-a-hobby-a-for-profit-hobby-or-a-business/

IRS Tax Filing Rules For eBay Sales
http://smallbusiness.chron.com/irs-tax-filing-rules-ebay-sales-55145.html

Don't Get Caught By The Hobby Trap
https://www.businessknowhow.com/money/taxhobby.htm

When The IRS Classifies Your Business as a Hobby
https://turbotax.intuit.com/tax-tools/tax-tips/Small-Business-Taxes/When-the-IRS-Classifies-Your-Business-as-a-Hobby/INF22852.html