Hobby Question

[peggysioux]

Does anything need to be reported on line 21 of the 1040 if gross income less the cost of goods equals zero? Cost of goods is strictly the cost of product, no additional costs are included. $1000 gross income less $1000 cost of goods sold. (I know what you are thinking....because I am thinking the same thing....why would anyone sell something for the same price that they purchased item for.)

Peggy Sioux

[New York Enrolled Agent]

I am thinking the same thing....why would anyone sell something for the same price that they purchased item for.)

Peggy Sioux

What did the taxpayer say when you asked him/her that very question?

[DaveO]

Maybe because the activity is performed merely for their personal pleasure and is therefore the very definition of a hobby?

[peggysioux]

Hobby Question

Taxpayer said she was just doing it for fun.....so if gross income less cost of goods netted to zero, should anything show on line 21?

Peggy Sioux

[Burke]

If you are trying to use Line 21 instead of a Schedule C, then gross income goes on that line. Any COGS/expenses properly go to Sche A, subject to the 2% haircut, so it won't be a "wash." And I don't think Schedule C will fly as there is no profit motive.

[peggysioux]

If you are trying to use Line 21 instead of a Schedule C, then gross income goes on that line. Any COGS/expenses properly go to Sche A, subject to the 2% haircut, so it won't be a "wash." And I don't think Schedule C will fly as there is no profit motive.

According to IRS:

Gross Income
Treas. Reg. 1.183-1(e) provides that for purposes of IRC § 183, gross income derived from an activity not engaged in for profit includes the total of all gains derived from the sale, exchange, or other disposition of property, and all other gross receipts derived from such activity. Gross income may be determined from any activity by subtracting the cost of goods sold from the gross receipts as long as the taxpayer consistently does so and follows generally accepted methods of accounting in determining such income.

Therefore, the COGS/expense portion does not carry to Schedule A. So again, if gross income less COGS nets to zero, what should be shown on line 21, if anything?

Peggy Sioux

[DaveO]

Peggy,
When I have done this I have attached a schedule as a preparer note. Your client should not have gotten any 1099 forms so no 3rd party reporting. I just want the schedule to show I looked at it.
Dave

[Roland Slugg]

Peggy Sioux is correct. When hobby income is reported on F-1040, line 21, the gross income goes there, not the gross sales amount. Gross income is sales less COGS. It's the amount that would appear on Schedule C, line 7. The deductions to which Burke referred are those that would be listed in Part II of Schedule C. For a hobby, those expenses are deductible only on Schedule A and are subject to the 2% haircut.

I'm guessing this "hobby" is Revlon, Mary Kay, Tupperware or something similar. If so, that $1,000 in COGS almost surely includes items used for personal purposes. Remove that portion of the purchases, and you probably end up with a small profit. I'd be strongly inclined to report this activity on Schedule C or Schedule C-EZ. There was probably a small amount of automobile mileage, as well.