Horse breeders awards

[Redneck]

Breeders awards, self employed income or not. Does not own a farm. Does not file Sch F.

[Jiggers]

Why the award?

Breeders awards, self employed income or not. Does not own a farm. Does not file Sch F.

Why did he receive the award?

[DaveO]

Not, if they are not taking a deduciton for the activity they are not engaged in a trade or business.

[gkaiseril]

Unless in the business or Horse Breeding or a related business, these awards would be hobby income.

If there is a profit after expenses, then Schedule C and SE.

If a loss, miscellaneous income and expenses on Schedule A subject to 2% of AGI up to the amount of income received.

[DaveO]

Why would you report hobby income on "C"?

[Redneck]

Sold

Why did he receive the award?

Sold the philly back in 2004. Now horse is winning. Not in the horse business. Registered as the breeder.

[gkaiseril]

Why would you report hobby income on "C"?

To pay the income taxes and SE tax on the profits, but not offsetting taxable income from personal hobby losses. So the loss is tax neutral

Similar to not being able to take a loss on the sale of personal property but paying taxes on the gain and the loss is tax neutral.

But in some states with an income tax, this is not tax neutral.

See http://www.irs.gov/newsroom/article/...169490,00.html for more information and links to other documents about hobby income and loss.

[Davc]

Was he in the business in 2004? And was the filly sold with a condition that additional money would be paid if she started winning?

Please clarify "breeder awards". Who paid the award and why?

[Redneck]

Please clarify "breeder awards". Who paid the award and why?

Breeders awards are paid to the breeder of the horse, usually a percentage of the winnings.
The horse breeders association pays the award out of the winnings.
This person has never been in the business of horses. He had a mare in 2004 and bread it and the filly was produced. He registered the filly as owner and breeder. He gave the filly to another person who started to run the filly in some races, she started winning and as the registered breeder he was awarded the money.

[DaveO]

Davc raises a good point. If the TP was in the business of breeding horses in 2004 and the filly was sold with some sort of agreement for future income then I could understand putting it on "C". If there never was a business and they were just owners of pleasure horses who got lucky with a filly then I'd still put it on Line 21 as hobby income foregong the SE tax. I know the position of the IRS is, "If a profit its a business, if a loss its a hobby" but the intent of the TP is important.

I see it no different than someone who raises chickens as a hobby but enters poultry competitions and wins an occasional cash prize. Taxable? Sure, but not subject to SE tax. Now if the owner is filing a "F" and deducting costs of feed and selling eggs then the arguement could be made that the prize income is an extension of the farming activity and therefore subject to SE tax.

[Gary2]

To pay the income taxes and SE tax on the profits, but not offsetting taxable income from personal hobby losses. So the loss is tax neutral

There is no SE tax on hobby income, gross income (before deductions) is reported on line 21, deductions are taken on Schedule A, in a specified order with limits. See the "Not-for-Profit Activities" section starting on page 5 of Pub. 535.

Remember that in this context "Not-for-Profit" does not mean you didn't make a profit; it means the intent of the activity is not to be running a business or making a regular profit. There are many activities that turn a profit as a result of your labor without being Sch. C self-employment. (Royalties from a book, without being a professional author, is another example that comes to mind.)

[gkaiseril]

There are many factors to consider. Taking the author example. What about the author that self publishes and sells directly to the public, there are no royalties form a publisher or the author could create a publishing activity to provide them with the publishing , distribution and sales or their work product. Could they pay themselves a royalty? Sort of like renting one's office in home from one's self.

What about tax benefits? Taking the hobby precludes the ability to use the self employed tax deferred retirement plans. self employed health care, etc.

What about the state income tax issues? If there is a state income tax starting with the AGI and no schedule A deductions, maybe the Schedule C treatment would be beneficial.

How many hours are spent in the business aspect of the 'hobby' might move the hobby to a business activity.

There is no simple answer. And the real answer maybe forced by the IRS.

[DaveO]

(Royalties from a book, without being a professional author, is another example that comes to mind.)

I had an audit for a minister and had reported royalty income from a book on their schedule "C". The auditor actually suggested that I should have reported on "E" as royalty income. I explained the book was religous in nature and was sold and marketed through the minister's church and so was not a seperate activity but an extension of the minister activity. The minister traveled to other cities speaking and preaching and offered their books for sale at these events. SE tax was not at issue since they reported a net loss in that year so there would have been no net change in tax by changing it.

[Gary2]

There are many factors to consider. Taking the author example. What about the author that self publishes and sells directly to the public, there are no royalties form a publisher or the author could create a publishing activity to provide them with the publishing , distribution and sales or their work product. Could they pay themselves a royalty? Sort of like renting one's office in home from one's self.

They can't pay themselves a royalty, but they're still faced with the question of whether this is a business or a hobby based on IRS guidelines.

What about tax benefits? Taking the hobby precludes the ability to use the self employed tax deferred retirement plans. self employed health care, etc.
...
There is no simple answer. And the real answer maybe forced by the IRS.

I'm not sure what point you're trying to make. Since, as you say, the answer may be forced by the IRS, you can't simply say "I'll treat this as a business because I want to get the benefit of a SEP".

If the activity is still in the initial grey area, where it's not clear whether it will turn out to qualify as a business or as a hobby, then I suppose you may want to factor in other tax benefits to decide how to do the initial filing, holding open the possibility of amending later (but see Form 5213). But you can't flip-flop regularly based on whether or not there's a profit a given year. If a hobby turns a profit every four years, you can't decide to file the profitable years on Sch. C and the other years on Line 21/Sch. A.

[gkaiseril]

It was rhetorical question!

As a self employed individual they can not pay themselves, but if the author creates a corporation to provide the publishing, distribution, and sales activities, and form the corporation they could pay themselves a salary and/or a royalty from the corporation.

The '10' test for a hobby or business are guidelines but certainly not the ultimate determination of the business or hobby decision. It could take the U.S. Tax Court or the U.S. Supreme Court to make the final decision for a give situation.