Harlan Lunsford wrote:
- quote -

OK, but doesn't Congress and the IRC itself, by the lack of
a similar statute for profits like section 183 is for
losses, also make that assumption (or at least the IRS does
in their interpretation)? ;-)

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A.G. Kalman wrote:
(snippsnipsnipppp)

- quote -

yep, that get's us in trouble every time, when we or anyone
"ass".umes anything! (grin.

Are we getting busy yet?

Cheer$,
Harlan Lunsford, EA n LA

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Whit Matteson wrote:

[OP's son has received money for some music gigs, but
is arguing that it's a "hobby" because of it being
sporadic, not all gigs are paid, etc. For what's
worth, I TEND to agree that it's hobby.]

- quote -

If he actually receives a 1099, it might be best to file. If
you don't file, the government can file a substitute return
(including declaring it SE income) AT ANY TIME.

If they do so in 2007, you may not remember what the
argument was, or be able to justify it not being SE income
-- nor be able to reconstruct expenses that would be
deductible if it were Schedule C income.

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"Whit Matteson" <whit_mattesonAT[at]attDOT.net> wrote:

- quote -

It gets even more convoluted when you consider there are
special rules for church employees when FICA taxes are not
withheld... your original question mentioned you are "hired
by a church" for several occasions.

"Church employee income and deductions attributable to it
cannot be taken into account in determining the amount of
the employee's other net earnings from self-employment (Code
Sec. 1402(j)(1)) Thus, church employee income is not taken
into account in determining whether the $400 threshold has
been met with respect to the self-employment tax on other
self-employment income. Church employee income cannot be
reduced by any deductions other than the deduction for
self-employment tax (Code Sec. 1402(j)(1)(A))."

EXAMPLE:
Adams works for a church organization that has elected out
of social security coverage. He earns $200 during the year
working for the church and also earns $300 as a freelance
writer. His self-employment income from the church
organization is computed and taxed separately from the
freelance income. Therefore, the freelance income does not
meet the $433.13 floor and is not subject to self-employment
tax. Because his earnings from the church organization
exceed the separate $108.28 floor, they are fully taxable.
No deductions are allowed to reduce this income.

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Harlan Lunsford wrote:
- quote -

I agree with you. I just take issue when someone starts
with the underlyimng assumption that when income less
expense is a "profit" you have SE net earnings!

--
Alan
http://taxtopics.net

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Harlan Lunsford wrote:

- quote -

Actually, the more likely issue will not be an auditor, but
rather the IRS computer spitting out an SE assessment based
on a 1099-MISC matching program. The law is pretty
straight-forward, and Alan is right that with the facts in
hand the agent will have a tough time supporting a finding
that the person was self-employed. And to have a "real
live" agent in the room, there likely would be other issues
than this in play <grin> , since the amount is rather small.

However, when we're dealing with automated notices, the
amounts can be a lot smaller. But, in this case, if no
single outfit paid him more than $600 so there are no
1099-MISC issued, the odds of there being a question there
go away.

I would certainly generally recommend taking the position
this was not self-employment income on the return.

--
Ed Zollars, CPA
Phoenix, Arizona

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Noted, but I have yet to see a "profitable hobby." :-)

(Capital gains from the sale of assets used in a hobby
notwithstanding.)

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A.G. Kalman wrote:
- quote -

Agree with you last statement; but.....

You need to understand that what Nan is referring to ( I
think!) is what happens in an audit situation and not at
some processing clerk's work station.

When you're sitting across the table and crossing swords
with an IRS auditor, examiner, whatever, they're hounds for
assessing the SE tax on anything that even smells like
profit. At this time then, the burden of proof shifts to
the taxpayer to prove it is not regular activity, but just
sporadic.

Been there, done that.
Cheer$,
Harlan Lunsford, EA n LA

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"Whit Matteson" <whit_mattesonAT[at]attDOT.net> wrote:

- quote -

Thanks for the responses; I'm a little uncertain still
though, partly because of the diversity of responses (which,
of course, is part of the fun), and partly based my own
reading of the Pubs.

** Pub 535 **
D. Stussy wrote: "The "hobby vs. business" rules address the
disallowance of LOSSES. There's no loss here."

This is true, especially of Pub 535, where the discussion of
not-for-profit activities starts off with "If you do not
carry on your business or investment activity to make a
profit, there is a limit on the deductions you can take."
The text that follow mentions hobbies as an example of a
not-for-profit activity, but it never says that such income
is not subject to SE tax, only that your losses or limited.
Of course, Pub 535 is titled "Business Expenses", so it
isn't surprising that it doesn't go into detail about how to
report non-business income.

** Sch C **
The Sch. C instructions say "An activity qualifies as a
business if your primary purpose for engaging in the
activity is for income or profit and you are involved in the
activity with continuity and regularity. For example, a
sporadic activity or a hobby does not qualify as a business.
To report income from a nonbusiness activity, see the
instructions for Form 1040, line 21."

Thus, the profit motive is not the ONLY consideration in
figuring out where the income should be reported. I think
that, in this case, a good case could be made for profit NOT
being the motive (for example, he has played the trumpet for
many years, and never made a profit until now, partly
because he played fewer gigs, and partly because he had
expenses for lessons). But a case could also be made for
the activity being sporadic.

** 1040 line 21 **
The issue is then further confused by the 1040 line 21
instructions, which say not to report non-employee
compensation from 1099-MISC there, but rather to see the
table of 1099 instructions on an earlier page. That table
says such income should be reported on Sch. C "But if you
were not self-employed, see the instructions on Form
1099-MISC. The instructions on the 1099-MISC for box 7 are
not helpful; they say "If payments in this box are SE
income, report this amount on Sch C and complete Scedule SE"
but don't address what to do if the payments are not SE
income.

** Pub 533 **
Pub 533 "Self Employment Tax" says you are self-employed if
you carry on a trade or business as a sole proprieter, and
goes on to clarify that "A trade or business is generally
an activity carried on for a livelihood or in good faith to
make a profit. The facts and circumstances of each case
determine whether or not an activity is a trade or business.
The regularity of activities and transactions and the
production of income are important elements. You do not need
to actually make a profit to be in a trade or business as
long as you have a profit motive. You do need, however, to
make ongoing efforts to further the interests of your
business."

** Internal Revenue Code **
Sec. 1.183-2
(http://a257.g.akamaitech.net/7/257/2...cfr1.183-2.htm)
elaborates on the list of relevant factors, and in almost
every instance, the facts of the case would seem to argue
that the activitiy is not a business.

SO ... I realize that for the most part, the publications
are written from the perspective of disallowing losses on
income that wasn't really business income. But it seems to
me that I can use the same rules to justify treating this
income as non-business income:
a) the is little evidence of a profit motive
b) it is not carried on regularly
c) he does nothing to further the interests of his
"business"

If that's the case, he's not required to file a return at
all. Would it make things better or worse to go ahead and
file one anyway, showing the income on line 21 as "hobby
income" so there's something to match the 1099's against?

Whit Matteson

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rick++ wrote:

- quote -

That's up to 4 increments of $890 (I thought it was up to
$910), rather than $890 in a three-month period....

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rick++ wrote:

- quote -

I sure hope the OP reads your response, rick. Unless social
security goes broke and congress in their finite wisdom does
not fix it, and therefore we're all up "the" creek without
that proverbial paddle, even young people should remember
disability possibilities.

Cheer$,
Harlan Lunsford, EA n LA

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Nan Eklund wrote:

- quote -

You know I'm agreeing with you about the fact that is is SE
income, since he has a track record and net profits will be
400+. Thus the burden of proof that it is NOT "for profit'
is on taxpayer.

If he's going to file a return and claim he's not liable for
SE tax, then I think a statement should be sent along with
the return outlining the facts and circumstances involved
here.

(Hey, I like that phrase: facts and circumstances.
Maybe I'll copyright it.

Cheer$,
Harlan Lunsford, EA n LA

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Nan Eklund wrote:

- quote -

I have a real problem with this generalization. The IRS has
no idea whether there is a profit/loss until a taxpayer
files a 1040 with a Schedule C. If the taxpayer, based on
all the information available on this subject (he reads this
forum), decides, right or wrong, that this is a recreational
activity, hobby, not for profit activity, etc. etc, and
reports it as Other Income and may or may not deduct certain
expenses on a Schedule A the IRS does not automatically flag
every one of these returns. If the IRS does flag it, the
taxpayer is going to have to substantiate the fact that it
is not self-employment income. This is a facts and
circumstances decision. There is a litany of information
available via IRS guidance and court cases that define how
this determination is made.

The mere fact that someone generates net income from an
activity means that it is self-employment income is just
plain wrong.

--
Alan
http://taxtopics.net

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"Whit Matteson" <whit_mattesonAT[at]attDOT.net> wrote:
- quote -

"Whether an individual is carrying on a trade or business
for purposes of section 1402 of the Code is a question of
fact that depends on an analysis of the individual's intent
as determined from all of the facts and circumstances.
Higgins v. Commissioner, 312 U.S. 212 (1941). To engage in
a trade or business, the taxpayer must be involved in the
activity with continuity and regularity and the taxpayer's
primary purpose for engaging in the activity must be for
income or profit. "A sporadic activity, a hobby, or an
amusement diversion does not qualify." Commissioner v.
Groetzinger, 480 U.S. 23 (1987)."

I would say if you can prove your intent is not income or
profit your are covered. How do you prove intent? You
could keep a log of all performances (paid and unpaid) and
if you are mostly unpaid it could show that the paid
performances were sporadic and not primarily for the income.
If however your paid performances outnumber the unpaid it
could be argued that you only usually play for the income.

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Whit Matteson wrote:

- quote -

Since there's a net profit, the question for tax purposes is
moot. If the amount of the net is under $433, even the
self-employment tax question is moot.

The "hobby vs. business" rules address the disallowance of
LOSSES. There's no loss here.

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The problem is that he DID make a profit. Intentional or
not. Again, if there is a profit, there is no way the IRS
will let it go without charging SE tax. The word "intention"
is part of the argument in Tax Court when you are trying to
write OFF expensive hobbies. Most of us have survived hobby
audits, not always happily.

Nan, EA in LA

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Another motive for going the hobby track rather than the
self-employment track is that the SE tax is not counted
toward social security benefits until your income exceeds
$890 in a three-month period. It never hurts to start
accumulating quarters, even if you are young. You need 5
years for disability, 10 years for retirement, and 35 years
for a large retirement benefit.

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"Arthur Kamlet" <kamlet[at]panix.com> wrote

- quote -

His full-time profession is music. And if you were to take
a gander at the IRS Audit Guide for musicians, it covers
stage attire. Now I don't let my bands deduct everything,
but if there is something that is just for "the show", we
expense it out. Artists and entertainers don't play 100% by
the regular rules.

--
Paul A. Thomas, CPA
taxman at negia.net

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"A.G. Kalman" <agk202[at]netscape.net> wrote:
- quote -

He might invest a few hundred hours a year in trumpet
playing, but not for money; just playing in the college band
class, at football games, and band concerts. The time
invested in playing for money is more like dozens of hours.

I tried to supply all the information that I thought would
matter, but if there are other factors to consider, I can
supply more :-).

It's encouraging to see that I've gotten two different
opinions on this, which about matches my own thinking on the
matter :-p.

Thanks for your help.

Whit

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"Paul A Thomas" <taxman[at]negia.net> wrote:
- quote -

Nope - no special attire, no long distance, no travel, no
meals, no advertising, no office expenses, no ... well you
get the idea. He comes by the engagements via connections
through Mom or through the college band director. He
usually gets a ride with somebody, but might drive once or
twice. My guess is that his expenses are less then $25 for
the year.

- quote -

Yes, exactly. Can you elaborate as to why you don't think
it would pass? Do you think there is enough evidence of an
intention to make a profit, to push it out of the "hobby"
realm, or is there more in your thinking?

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