Hobby Income and Expenses

[GTS1101]

I have a client who is running his own softball team. He has not set it up as a non-profit because he did not like a lot of the rules and regulations involved. The softball team generally does not make a profit. What he earns at tournaments and from players is put back into the team to buy equipment, take trips, buy uniforms, etc. In 2004 & 2005 he had approx a (3,000) loss for each year. He told me that it is possible that in some years he may make a small profit of $200-$500 but most of the years will be a loss Should this be reported on a Schedule C as a business? He most likely will not show a profit in 3 out of 5 years. I was going to suggest since he will most likely have a loss each year not to show it because it is a hobby and not a business. Is my assumption correct or do you believe this should be reported?

Thanks for your help!

GTS1101

[GTS1101]

Roth IRA

If I invest 2,000 into a Roth IRA in 2002 and I decide to withdraw my invest in 2006 and the IRA is now valued at 2,200 as it earned $200 in four years, do I have to pay the 10% penalty on the whole 2,200 balance withdrawn early or just on the $200 in earnings? My age would be below 59 1/2 and the Roth IRA was only kept for four years and not five. The way I understand the law is that the penalty is only on the $200 and there is only tax on the $200 since the first 2,000 was my orignial investment and was after tax dollars? Please let me know if my assumption is correct.

Thanks!

GTS1101

[solomon]

Correct

As you describe your situation, I believe you understand the ordering rules correctly.

[DonPriebe]

Hobby Income and Expenses

If it is a hobby, then the REVENUES from that hobby (not just the net earnings) go on Line 21 as Other Income. The expenses are deductible only on Schedule A as miscellaneous itemized deductions subject to 2%, and are limited to hobby revenue. So your client will have net taxable income in all cases, even if he "shows a loss".

Unless he actually has a profit motive in running this league, showing it on Schedule C is incorrect. Is he in the sports promotion business? Charging admission, selling concession rights, paying for the insurance?

He may not like rules and regulations, but it seems that the non-profit organization is the way to go.

[Roland Slugg]

Softball team is a hobby

Dear GTS1101

This is in reply to your first post ... about the softball team. (Your Roth question should have been started in a new thread.)

Since the organizer of the softball team clearly has no profit motive ....

In 2004 & 2005 he had approx a (3,000) loss for each year. He told me that it is possible that in some years he may make a small profit of $200-$500 but most of the years will be a loss.

.... this is not a trade or business. I concur with most of what DonPriebe wrote above, although the 2% floor may not significantly limit the softball expenses, as that floor could be exceeded by the taxpayer's other miscellaneous itemized deductions. The gross income reportable on F-1040, however, could serve to limit other credits and deductions, due to various phase outs, and at the very least it will increase the 2% amount on Schedule A itself.

You may wish to see Code §183(a), related Regs §1.183-1(a) and Regs 1.67-1T(a)(1)(iv).

[Unregistered]

I would disagree slightly with what has been said by another poster ( though a softball team may not be a good example for this difference). I believe the amount on line 21 would be the Gross Income from the hobby. It would be calculated in a manner similar to the gross income on Schedule C, line 7. The difference between a business and the hobby occurs with respect to the remaining expenses.

Gross income = Revenue - returns - cost of goods sold.

Other expenses would go to Schedule A.

New York Enrolled Agent

[Bees Knees]

I'm not sure how a softball teem would have "inventory" to subtract from gross revenues. You are correct, though, that if there is a cost of goods sold, that gets subtracted out before going on line 21 of the 1040. The rest goes on Schedule A.

One way to get around the hobby loss rules, is to elect C corporation status. Section 183 applies to S corporations, but not C corporations.

C corporations are not required to have a profit motive; an example being homeowners associations that have not elected to file on Form 1120-H.

Since there is no real profit, the C corp would never really pay tax. Even in small profit years, the NOL carryovers would wipe out tax.

You would not have to file any papers with the state to be a C corporation for federal tax purposes, because you could simply just elect C corp status on Form 8832. Again, that is kind of how associations get taxed as a C corp. They don't really do anything to be a C corp. They just kind of exist as economic activities to pay for common expenses of a group project. That is what your softball team is. An economic unit existing simply to pay for the expense of playing softball, with nobody pocketing excess money.

[OldJack]

I agree with Bees that a C-corp would work good in this case as well as limit the liability of the owner which I find hard to believe that he would not have already wanted. However, to get the limited liability he should actually incorporate and not just make an election. There is great risk in operating a baseball team.

[BOB W]

Bees...

... I like that concept, file as a C Corp without State registration. All that is needed is a good liability insurance policy, which they probably already have..