Author Topic: Microstock - is it consider a hobby or business in the eyes of the IRS? (Read 11362 times)

No Free Lunch · « **on:** April 05, 2015, 19:11 »

I ran into an issue with our CPA person who is preparing our taxes this year. She feels that my microstock is a hobby and not a business. Even if I have an LLC and make money the IRS would still consider it a hobby in her eyes.
Also my home studio (100% dedicated to the business- no personal things in the room whatsoever) cannot be justified - It must be located away from the house (i.e., rent studio) and be dedicated 100% to the business- no work at home according to her.
So how do I determine if my microstock is a hobby or business? This is my 4th year working in this so-called business with portfolios in over 20 companies ranging from 2,600 images (Shutter) to over 4,500 images (Deposit photo)- my sales have grown over 200% each year as well as my portfolios.

Finally, my income exceeded my expense but she told that that doesn't constitute a business in the IRS eyes.

Any advice would truly help since I will try to convince her otherwise…
Thanks
Tom

DC · « **Reply #1 on:** April 05, 2015, 19:26 »

Try looking at this page:

http://www.irs.gov/uac/Business-or-Hobby%3F-Answer-Has-Implications-for-Deductions

shudderstok · « **Reply #2 on:** April 05, 2015, 19:26 »

I would get a second opinion. I am not sure about the USA and the IRS, but in Canada as far as it being a business or hobby that all depends. I make a full time living from shooting stock photos, so for me it is my business. Where it gets tricky is on the amount you make. For the sake of argument, if I make $2000 dollars I have to declare this as an income, and I can write off the expenses that were incurred to make that income. So if I make $2000 and my expenses are legitimately $1000 then that is considered a write off. I can legitimately write off 18% of my household rent/utilities as I use that proportion of my house to incur this income. If you are just floating above water and going the expense heave route, I think both sides of the border will make it difficult for you, but if you are clearly making an income be it a part time one, then your expenses should be deducted. Again, I am only aware of the Canadian tax system, and I would suggest you get a second opinion from a Certified General Accountant.

dbvirago · « **Reply #3 on:** April 05, 2015, 19:30 »

I would definitely get a 2nd opinion. If you are making money at this, you are getting 1099s that are reporting your income to the IRS. Unless you are racking up 'expenses' to show losses that offset other income, their is no downside to filing a schedule C.

No Free Lunch · « **Reply #4 on:** April 05, 2015, 20:17 »

Quote from: DC on April 05, 2015, 19:26

Try looking at this page:

http://www.irs.gov/uac/Business-or-Hobby%3F-Answer-Has-Implications-for-Deductions

I had a paper addressing each one of these question but the CPA told that photography still will get a red flag- it's the profession that most CPA's are scared to write off as a business. I told my CPA what if you did you business from home is that a hobby now- they said no because they are a CPA but I don't have any certification.

No Free Lunch · « **Reply #5 on:** April 05, 2015, 20:21 »

Quote from: shudderstok on April 05, 2015, 19:26

I would get a second opinion. I am not sure about the USA and the IRS, but in Canada as far as it being a business or hobby that all depends. I make a full time living from shooting stock photos, so for me it is my business. Where it gets tricky is on the amount you make. For the sake of argument, if I make $2000 dollars I have to declare this as an income, and I can write off the expenses that were incurred to make that income. So if I make $2000 and my expenses are legitimately $1000 then that is considered a write off. I can legitimately write off 18% of my household rent/utilities as I use that proportion of my house to incur this income. If you are just floating above water and going the expense heave route, I think both sides of the border will make it difficult for you, but if you are clearly making an income be it a part time one, then your expenses should be deducted. Again, I am only aware of the Canadian tax system, and I would suggest you get a second opinion from a Certified General Accountant.

That is the exact talk I had with the CPA- how much do I have to make to get the IRS to believe I am a business? Do I have to make $30K, $50K or $100K a year? And why would I need a rented studio to shoot style lifes that I can do right at home? Plus I told her about food photography and she said I better not be eating it right after I shoot it! She appeared to not like photographers - and told me everyone has camera so we are pro's now?

No Free Lunch · « **Reply #6 on:** April 05, 2015, 20:23 »

Quote from: dbvirago on April 05, 2015, 19:30

I would definitely get a 2nd opinion. If you are making money at this, you are getting 1099s that are reporting your income to the IRS. Unless you are racking up 'expenses' to show losses that offset other income, their is no downside to filing a schedule C.

The CPA told me that if I write off say travel I better be able to prove each day what I was shooting and document the hours of work! And no dinners unless I meet with business clients!

DC · « **Reply #7 on:** April 05, 2015, 20:27 »

Sounds like you should find a different CPA.

No Free Lunch · « **Reply #8 on:** April 05, 2015, 20:31 »

Quote from: DC on April 05, 2015, 20:27

Sounds like you should find a different CPA.

She mention when I go on so called 'Travel of Business' how do I prove to the IRS that I am not just on vacation sipping on drinks at the pool - which by the would make a decent stock shot lol!

ruxpriencdiam · « **Reply #9 on:** April 05, 2015, 21:36 »

https://turbotax.intuit.com/tax-tools/tax-tips/Small-Business-Taxes/When-the-IRS-Classifies-Your-Business-as-a-Hobby/INF22852.html

http://www.irs.gov/uac/Newsroom/Five-Basic-Tax-Tips-about-Hobbies

http://www.irs.gov/Help-&-Resources/Tools-&-FAQs/FAQs-for-Individuals/Frequently-Asked-Tax-Questions-&-Answers/Small-Business,-Self-Employed,-Other-Business/Income-&-Expenses/Income-&-Expenses

http://www.nolo.com/legal-encyclopedia/operating-losses-prove-hobby-business-30000.html

http://www.forbes.com/sites/anthonynitti/2013/07/22/how-not-to-run-a-side-business-navigating-the-hobby-loss-rules/

No Free Lunch · « **Reply #10 on:** April 05, 2015, 21:55 »

Quote from: ruxpriencdiam on April 05, 2015, 21:36

https://turbotax.intuit.com/tax-tools/tax-tips/Small-Business-Taxes/When-the-IRS-Classifies-Your-Business-as-a-Hobby/INF22852.html

http://www.irs.gov/uac/Newsroom/Five-Basic-Tax-Tips-about-Hobbies

http://www.irs.gov/Help-&-Resources/Tools-&-FAQs/FAQs-for-Individuals/Frequently-Asked-Tax-Questions-&-Answers/Small-Business,-Self-Employed,-Other-Business/Income-&-Expenses/Income-&-Expenses

http://www.nolo.com/legal-encyclopedia/operating-losses-prove-hobby-business-30000.html

http://www.forbes.com/sites/anthonynitti/2013/07/22/how-not-to-run-a-side-business-navigating-the-hobby-loss-rules/

Thank you! The last link really helped! I think the CPA feels that it cannot be a business since I do it part time only and have my day time job that pays the mortgage.

cascoly · « **Reply #11 on:** April 05, 2015, 22:47 »

Quote from: No Free Lunch on April 05, 2015, 20:31

Quote from: DC on April 05, 2015, 20:27
Sounds like you should find a different CPA.

She mention when I go on so called 'Travel of Business' how do I prove to the IRS that I am not just on vacation sipping on drinks at the pool - which by the would make a decent stock shot lol!

it REALLY sounds like you need a different acct -- there are accepted ways to handle all of their objections -- start with the IRS publications themselves

sweetgirll · « **Reply #12 on:** April 05, 2015, 23:07 »

Hi, I also think you should get a second opinion, if you could find a CPA/ Accountant used to deal with home based business...

there is a great blog by a CPA geared towards indies, musicians, artists and she addresses the home business, hobby x business thing, is quite interesting ....http://junewalkeronline.com/blog/

So, out of curiosity, what state are you in?

Semmick Photo · « **Reply #13 on:** April 06, 2015, 01:56 »

I am in Ireland, and my accountant is happy enough to write off my rent and utilities and travels partly as business expense.

Shelma1 · « **Reply #14 on:** April 06, 2015, 05:29 »

Get another accountant. In my industry (advertising) we look for/recommend accountants who are familiar with creative businesses. If you're making a profit, I don't see why you couldn't take deductions related to the business. I think your accountant might be used to people who have expensive hobbies that make no money who then try to offset their hobby's expenses by claiming them as deductions.

As for proof that you were working on your trips...you have lots of photos taken during those trips and list those photos on micro sites, and can easily grab screenshots showing you're making an income from licensing, no?

No Free Lunch · « **Reply #15 on:** April 06, 2015, 08:58 »

Quote from: Shelma1 on April 06, 2015, 05:29

Get another accountant. In my industry (advertising) we look for/recommend accountants who are familiar with creative businesses. If you're making a profit, I don't see why you couldn't take deductions related to the business. I think your accountant might be used to people who have expensive hobbies that make no money who then try to offset their hobby's expenses by claiming them as deductions.

As for proof that you were working on your trips...you have lots of photos taken during those trips and list those photos on micro sites, and can easily grab screenshots showing you're making an income from licensing, no?

100% in agreement with you! Thanks Tom

No Free Lunch · « **Reply #16 on:** April 06, 2015, 09:14 »

forgot to ask- by having a CPA do my taxes do I reduced the chance of an audit? If not, maybe I can just use turbo tax and do them myself?

hansenn · « **Reply #17 on:** April 06, 2015, 10:20 »

what would be more profitable for you (OP): carrying on microstock as a hobby or making it a business?
Just a question out of curiousity

Shelma1 · « **Reply #18 on:** April 06, 2015, 10:23 »

Quote from: No Free Lunch on April 06, 2015, 09:14

forgot to ask- by having a CPA do my taxes do I reduced the chance of an audit? If not, maybe I can just use turbo tax and do them myself?

In my experience a CPA will tell you about deductions or deduction amounts that will raise red flags to the IRS, but after a few years I knew all the red flags (which I never came close to anyway), so I started using Turbotax. I'm not sure either way will reduce your chances of being audited, except for the red flags your accountant might point out.

Mantis · « **Reply #19 on:** April 06, 2015, 10:30 »

Quote from: Shelma1 on April 06, 2015, 10:23

Quote from: No Free Lunch on April 06, 2015, 09:14
forgot to ask- by having a CPA do my taxes do I reduced the chance of an audit? If not, maybe I can just use turbo tax and do them myself?

In my experience a CPA will tell you about deductions or deduction amounts that will raise red flags to the IRS, but after a few years I knew all the red flags (which I never came close to anyway), so I started using Turbotax. I'm not sure either way will reduce your chances of being audited, except for the red flags your accountant might point out.

Thats exactly right. I have these discussions every year with my cpa. I write off a lot in gear and i get very nervous at tax time. To avoid flags i do not write off any of my house as an office when i legally could. Its always a good idea to seek and have professional advice. Your cpa doesnt seem to have the essential broad knowledge needed to give you realistic tax guidance.

Shelma1 · « **Reply #20 on:** April 06, 2015, 10:36 »

I don't' deduct any of my household expenses either. It requires having a dedicated space, only deducting expenses relating to the portion of your house where you conduct business, only deducting expenses relative to the portion of income that comes from working in that space (I also work onsite at ad agencies sometimes) and has financial repercussions down the road when you sell your house. My accountant felt it wasn't worth it and advised against it. I do deduct advertising expenses for my websites, though.

Uncle Pete · « **Reply #21 on:** April 06, 2015, 10:38 »

Don't know about audit for sure, but here's the difference.

Turbotax does what you tell it to do.

An accountant knows what belongs, where and what might not. Computer software doesn't find more deductions or advise you on how to manage expenses. Accountants go to school for taxes and the law (at least good ones do) and know what is allowed and what's not.

You won't be tempted to add a deduction that's improper and won't make a mistake deducting something that's not allowable. Do you depreciate your equipment, over years or when you purchase it. Then take the price of the sale, as income... You mentioned travel. Was it work or a vacation or some of both? (I don't want to know, but the IRS does)

Does your self employment make money? General guideline is two of the last five years. What it means is you can't just start a business to lose money and write off your cameras and travel.

That's why I pay an accountant, and she saves me more than what she costs. They are required by law to make accurate and honest returns. People who do their own, have a tendency to fudge the numbers sometimes. But an accountant can only work with what you give them.

Best advise for anyone, whether you like doing your own or feel better paying a trained specialist, is Keep Good Records that will protect you more than anything else, in the case of an audit.

I have a home office, I don't claim it. Red Flag!

Quote from: No Free Lunch on April 06, 2015, 09:14

forgot to ask- by having a CPA do my taxes do I reduced the chance of an audit? If not, maybe I can just use turbo tax and do them myself?

StanRohrer · « **Reply #22 on:** April 06, 2015, 11:55 »

USA experience here. I reported my photography as a hobby for many years. When the income started getting bigger I wondered about making it a business. Here are the results of my discussion with my CPA.

- Keep separate accounting and bank accounts and credit cards. Do not mix business and personal funds. On the occasions where funds jump that gap they must be reported in the business books (e.g. cash purchases - should use the business credit/debit cards instead, reimbursements such as mileage on a personal car, a share of internet expenses, owner's draw or salary). He wanted accounting software, not just my Excel spreadsheet, and recommended Quickbooks. Such software will aid in balancing the books and reconciling your bank accounts. QB has some cost effective online accounts that might suit you. I buy the software every few years.
- Business use of a room in the house was considered. But my room wouldn't pass an audit as it has non-photography items (guest bed, book case with non-photo related material, wife's computer). So to claim a few square feet and then unwind all those records at closure of the business or sale of the house seemed less than useful. You might be worthy of deductions for your studio. It does require work and clean record keeping.
- Keep a personal written log in your vehicles and record business use of the personal vehicle mileage. The IRS audit will want to see that written log. For me the mileage is my biggest yearly expense for my type of photography. It will easily outrun a new camera body.
- My hobby was cash positive for years (records via spreadsheets) before I started considering it a business. You have to meet the 3 of 5 years rule. Be sure you think you can meet the rule before defining the business. It might make sense to see $10,000 net cash positive as a hobby for a year or two before doing the business thing. You can still deduct expenses up to the level of income as a hobby.
- My accountant wanted to hear of a viable level of net cash positive before starting the business approach. He said to many "Mary Kay (home party)" new sale people get all cranked up the new venture, spend much time and money with the accountants and banks to get set up and then never get the business going well enough to cover the setup costs. Staying as a hobby precludes these setup losses.
- Record in your accounting books purchases of $1000 or more as capital expenditures. It seems like the $1000 is kind of arbitrary based on the accountant. But having records of capital shows signs of a business.
- He allows me to write down depreciation under the "at purchase time" Section 179 rules. Sale of equipment later than is a pure income. It keeps the depreciation calculations much more simple from year to year. http://www.irs.gov/pub/irs-pdf/p946.pdf

I thought about the Turbo Tax approach and think I could do it. I did TurboTax while operating as a hobby. But my accountant reviewed my taxes in a previous year and noted I might be paying to much interest on my home mortgage. He suggested I go see a specific mortgage broker and in the end I did a refi from 30 years to 15, lowered my interest from 5 to 2.875%, had only a couple hundred dollars fees, and came in at almost the same monthly payments. His observation will save me thousands of dollars over the years in my house. He keeps my business by watching my back and since TurboTax won't do this.

Uncle Pete · « **Reply #23 on:** April 06, 2015, 12:19 »

Good coverage Stan, and I forgot that "keep separate accounts part" my first accountant would go through the roof and said "You can't co-mingle business and personal!"

It's easy for anyone who's considering this to have a checking account, have all the PayPal income (for example - checks, any payments, anything for a photo business) Deposited into that checking account - only that account! The checking account will come with a Debit card. (don't ask for checks if you aren't going to write checks, save the money) Most banks will also try to get you to have a Credit card with them, in that business name. PayPal will chase you, trying to issue you a credit card.

Bottom line is, everything photo "business" comes and goes, through that one account. It's easier to justify and record income and expenses that way. At the end of the year, you'll have your reports, both from the bank and from the credit card.

Nothing personal can be bought from that account. However you can transfer funds out, to your personal account.

Better explanation of the capitol expenditures too Stan. Easier to calculate depreciation in whole numbers, not percentages over years. Less record keeping.

ArenaCreative · « **Reply #24 on:** April 06, 2015, 13:20 »

Vacations? Or "location scouting" trips? hahaha don't go crazy with your deductions if you can't legitimately explain/prove them. Too many people go overboard with this stuff.

PhotoLA · « **Reply #25 on:** April 06, 2015, 13:39 »

Hi Tom, it really sounds like you need a new accountant.

ultimagina · « **Reply #26 on:** April 06, 2015, 16:53 »

Even if it is hobby, you add the microstock income to your main income and deduct expenses like lenses and other hardware, parking, millage deductions for photography purposes, accommodation proportional to the time invested in photography.
If you have profit, see if you can still invest in a pension fund, instead of paying more taxes.

jefftakespics2 · « **Reply #27 on:** April 06, 2015, 17:04 »

In Canada there was a big test case involving a rich guy and his horse farm, which set the precedent. You need to have the reasonable expectation of making a profit and are allowed to operate at a loss until you can achieve a profitable operation, in a reasonable amount of time(which I believe is generally accepted as three years). Ditto on your needing a new accountant. At most, they should warn you that you are in a high audit group.

Holmes · « **Reply #28 on:** April 06, 2015, 18:46 »

My PROPS category is massive... much like my Amazon bill.

which is pretty much the same thing.

robhainer · « **Reply #29 on:** April 06, 2015, 19:03 »

Your accountant doesn't know jack. I'd get another one. Especially if you have an LLC that you're taking money into. I PM'd you some of what I do.

robhainer · « **Reply #30 on:** April 06, 2015, 19:05 »

Quote from: jrwasserman on April 06, 2015, 17:04

In Canada there was a big test case involving a rich guy and his horse farm, which set the precedent. You need to have the reasonable expectation of making a profit and are allowed to operate at a loss until you can achieve a profitable operation, in a reasonable amount of time(which I believe is generally accepted as three years). Ditto on your needing a new accountant. At most, they should warn you that you are in a high audit group.

I don't think you're in a high audit group unless you're making $250,000-plus. The main people they go after are doctors, lawyers, accountants, construction contractors. They really like pummel contractors, especially ones who try to pay piece pay instead of a salary or hourly wage. Like $20 for every door your install instead of $20 an hour.

The IRS is short-handed, thank God. Going after the little fish is too little reward.

And now I'll probably get audited this year even though I'm a tiny fish.

robhainer · « **Reply #31 on:** April 06, 2015, 19:11 »

Quote from: ultimagaina on April 06, 2015, 16:53

Even if it is hobby, you add the microstock income to your main income and deduct expenses like lenses and other hardware, parking, millage deductions for photography purposes, accommodation proportional to the time invested in photography.
If you have profit, see if you can still invest in a pension fund, instead of paying more taxes.

Good suggestion. There's all kinds of things you can do.

http://www.irs.gov/Retirement-Plans/Retirement-Plans-for-Self-Employed-People

jefftakespics2 · « **Reply #32 on:** April 06, 2015, 19:29 »

Quote from: robhainer on April 06, 2015, 19:05

Quote from: jrwasserman on April 06, 2015, 17:04
In Canada there was a big test case involving a rich guy and his horse farm, which set the precedent. You need to have the reasonable expectation of making a profit and are allowed to operate at a loss until you can achieve a profitable operation, in a reasonable amount of time(which I believe is generally accepted as three years). Ditto on your needing a new accountant. At most, they should warn you that you are in a high audit group.

I don't think you're in a high audit group unless you're making $250,000-plus. The main people they go after are doctors, lawyers, accountants, construction contractors. They really like pummel contractors, especially ones who try to pay piece pay instead of a salary or hourly wage. Like $20 for every door your install instead of $20 an hour.

The IRS is short-handed, thank God. Going after the little fish is too little reward.

And now I'll probably get audited this year even though I'm a tiny fish.

Actually, photographers are high on the audit list. Every accountant I have had has confirmed this. And yes, I have been audited.

Shelma1 · « **Reply #33 on:** April 06, 2015, 20:11 »

I called the IRS once to see if they had one of my tax returns on file, because I misplaced it and wanted my new accountant to look it over to see if I'd screwed anything up (I did my taxes myself for a couple of years). A few weeks later I got a letter (not my tax return) from the IRS. I opened it, feeling very queasy...and inside was a check for about $3,000. My call had obviously gotten them suspicious and triggered a review, and when they took a closer look they discovered I'd overpaid. It was either self-employment tax or Social Security, can't remember which. Ha! What a happy day that was. Still makes me smile.

No Free Lunch · « **Reply #34 on:** April 06, 2015, 20:28 »

Quote from: Shelma1 on April 06, 2015, 20:11

I called the IRS once to see if they had one of my tax returns on file, because I misplaced it and wanted my new accountant to look it over to see if I'd screwed anything up (I did my taxes myself for a couple of years). A few weeks later I got a letter (not my tax return) from the IRS. I opened it, feeling very queasy...and inside was a check for about $3,000. My call had obviously gotten them suspicious and triggered a review, and when they took a closer look they discovered I'd overpaid. It was either self-employment tax or Social Security, can't remember which. Ha! What a happy day that was. Still makes me smile.

Nice! If my business is not my main stream of revenue am I suppose to be paying social security? I already max out my social security tax with my main job.

Shelma1 · « **Reply #35 on:** April 06, 2015, 20:40 »

I think that was the problem...I'd paid Social Security tax on my entire income, not realizing there was a limit (wage base). So I don't think you need to pay more if you're already maxed out with your main job.

ultimagina · « **Reply #36 on:** April 06, 2015, 20:46 »

Quote from: No Free Lunch on April 06, 2015, 20:28

Quote from: Shelma1 on April 06, 2015, 20:11
I called the IRS once to see if they had one of my tax returns on file, because I misplaced it and wanted my new accountant to look it over to see if I'd screwed anything up (I did my taxes myself for a couple of years). A few weeks later I got a letter (not my tax return) from the IRS. I opened it, feeling very queasy...and inside was a check for about $3,000. My call had obviously gotten them suspicious and triggered a review, and when they took a closer look they discovered I'd overpaid. It was either self-employment tax or Social Security, can't remember which. Ha! What a happy day that was. Still makes me smile.

Nice! If my business is not my main stream of revenue am I suppose to be paying social security? I already max out my social security tax with my main job.

I'm also maxed-out from my main job. However, I was able to deposit in my wife's IRA what I was supposed to pay extra in taxes.

Dr Bouz · « **Reply #37 on:** April 09, 2015, 14:44 »

it is considered as "very" busines for me - -30% for all downloads made from us customers. (and it's unconstitutional - according to the us laws for example... -but, as a foreigner, it's more "take it or leave it" for me (and the others)). but - it's business. it's not hobby if you are making money out of it.

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Author Topic: Microstock - is it consider a hobby or business in the eyes of the IRS? (Read 11362 times)

No Free Lunch

shudderstok

dbvirago

No Free Lunch

No Free Lunch

No Free Lunch

No Free Lunch

No Free Lunch

Semmick Photo

No Free Lunch

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Uncle Pete

Uncle Pete

ultimagina

No Free Lunch

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