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Are you set up as a business?
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29 posts in this topic

Just curious as to if anyone here has (or has contemplated) setting up their hobby as a business so as to not have to payout sales taxes when they acquire new items, write off expenses, etc

any thoughts? I would think those with truly significant active collections would do this - any input on the pros and cons?

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On 12/23/2022 at 3:15 PM, shadroch said:

Starting a  business strictly to avoid paying sales taxes is unethical and may be illegal.

I think the OP was just using that example as one of the benefits of running a business. Then again, if the business strictly buys without selling anything, they won't be a business for very long... and they'll be back to paying sales tax with their hobby.

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I am thinking about starting a business to liquidate my collection, as from what I've read, the capital gains taxes are less for a business than they are for an individual collector. I've been meaning to sit down with an accountant to figure this out, but maybe someone here can illuminate the pros and cons.

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Other than not paying sales tax when purchasing inventory I’m curious as to what other benefits there are?  I’ve always accounted for eBay fees and grading costs when determining profit from sales even as a hobbyist seller. If you are setting up at shows I can see the benefits but not so much as a purely online pursuit. 

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On 12/24/2022 at 6:36 AM, rsouxlja7 said:

Capital gains are taxed at the lesser of 28% or your marginal rate for collectibles (note: has to be long term, can’t be a comic you bought and sold in less than a year). If you put your sales on a Schedule C you'll be at your marginal rate + self employment taxes (~15%) but you have a lot more options when it comes to claiming expenses that you don't have with capital gains, such as claiming your cell phone, internet, QBI deduction, etc. There's also the ability to lower your taxes with the Sch C by utilizing a self-employed IRA. You don’t need to set up an LLC or anything to do this, by the way. 
 

Run the numbers both ways and see which way turns out better. 

I guess this is where my confusion is at - the articles I've read usually indicate that collectibles are taxed at flat 28% long-term capital gains rate for a non-business. (So maybe I'm reading those articles wrong - this is from a Forbes article:
Capital Gains Taxes on Collectibles:
If you realize long-term capital gains from the sale of collectibles, such as precious metals, coins or art, they are taxed at a maximum rate of 28%.
.)

You're saying they are taxed at my marginal tax rate? (Which is quite a bit lower.)

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On 12/24/2022 at 11:32 AM, lizards2 said:

I guess this is where my confusion is at - the articles I've read usually indicate that collectibles are taxed at flat 28% long-term capital gains rate for a non-business. (So maybe I'm reading those articles wrong - this is from a Forbes article:
Capital Gains Taxes on Collectibles:
If you realize long-term capital gains from the sale of collectibles, such as precious metals, coins or art, they are taxed at a maximum rate of 28%.
.)

You're saying they are taxed at my marginal tax rate? (Which is quite a bit lower.)

 

On 12/24/2022 at 9:36 AM, rsouxlja7 said:

Capital gains are taxed at the lesser of 28% or your marginal rate for collectibles (note: has to be long term, can’t be a comic you bought and sold in less than a year). If you put your sales on a Schedule C you'll be at your marginal rate + self employment taxes (~15%) but you have a lot more options when it comes to claiming expenses that you don't have with capital gains, such as claiming your cell phone, internet, QBI deduction, etc. There's also the ability to lower your taxes with the Sch C by utilizing a self-employed IRA. You don’t need to set up an LLC or anything to do this, by the way. 
 

Run the numbers both ways and see which way turns out better. 

If you have already hit your income limit for paying SS taxes the self employment tax should not be an issue

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Capital gains are taxes on investments.  If you are buying and selling as a business, they are not capital gains, they are your income.  Regardless, for either you must have a record of what you bought and sold your inventory for.  An advantage as a business is that you do not pay sales tax on stock meant for resale. With tight margins, this is a must.  But they have to be for resale... they can't go into your personal collection.  A disadvantage is that you'll have to collect and file sales taxes.  Most businesses file monthly... if you're not doing much volume, you might only have to file quarterly, but it varies in each state.  In my state, you also pay an annual $150 "commercial activities tax" as a business.  As a business, you also cannot show perpetual losses (3 years max? Not sure.).  If you're working from home, it can set off red flags if you're writing off a lot of office expenses, even if legit.  Any business must have some level of professional accountant, in my opinion.  

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The IRS recently announced they are pushing the 1099-K requirement for online sellers with revenues over $600 to 2023...

That should give some of us hobbyist/small business owner hybrids another year to get it figured out.

IRS will delay requirement to report $600 in gig work on taxes (msn.com)

 

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The IRS is not fond of you classifying  your hobby as a business just because it suits you. They have a set of criteria that should be met in order to be allowed to file as such. One of the big reasons is that business losses, once they exceed gains, can be applied to personal income. Hobby losses can only be applied to hobby gains.

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On 12/24/2022 at 10:32 AM, lizards2 said:

I guess this is where my confusion is at - the articles I've read usually indicate that collectibles are taxed at flat 28% long-term capital gains rate for a non-business. (So maybe I'm reading those articles wrong - this is from a Forbes article:
Capital Gains Taxes on Collectibles:
If you realize long-term capital gains from the sale of collectibles, such as precious metals, coins or art, they are taxed at a maximum rate of 28%.
.)

You're saying they are taxed at my marginal tax rate? (Which is quite a bit lower.)

Correct, if your marginal rate is lower it won't be taxed @ 28%. 

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On 12/24/2022 at 1:47 PM, Dr. Love said:

The IRS is not fond of you classifying  your hobby as a business just because it suits you. They have a set of criteria that should be met in order to be allowed to file as such. One of the big reasons is that business losses, once they exceed gains, can be applied to personal income. Hobby losses can only be applied to hobby gains.

Right. But I have been collecting most of my life, so have somewhere between 300 and 400 short boxes, and could legitimately stock a business for 5-6 years. It would no longer be a hobby, but a liquidation before I die.

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