# Buisness vs Hobby



## krisrimes (Jun 17, 2011)

I was hoping that some of you that run wood working businesses would educate me on the difference between selling as a hobby vs. selling as a business. Is there a certain amount of money that you have to make before you need a business license?


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## Texchappy (Apr 27, 2012)

Not an expert on this but to my knowledge it varies from state to state with local laws layered on top of that. Where are you located?


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## Pono (Mar 10, 2012)

If you just make stuff here and there dont worry about it.If you are making 2k a week better get that business license and pay taxes


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## krisrimes (Jun 17, 2011)

No where near 2K a week. I would be lucky to make a couple of thousand a year in profit. I just didn't know if there was a definate dividing line. I am in Florida.


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## killerb (Nov 1, 2011)

Talk with your accountant and a lawyer. Best advice there is. I don't think asking here is a sound way to find out. Too many variables. bob


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## Loren (May 30, 2008)

You can probably get a resale number and say you sell at 
craft shows which will get you away from inquiries from
agencies looking for revenue. State laws vary of course
but in general there are regulations having to do with
a flow of drive-up customers to the home. Some concerns
have to do with parking availability in denser population areas.

You can probably set up something that keeps your costs
very well controlled and won't get you in trouble if you
keep a low profile, which isn't usually difficult for a 
1-man shop.

Do consult an accountant. With a state resale number 
you can buy from some suppliers who wouldn't otherwise
sell to you and you can also buy stuff like Barge contact
cement, which isn't sold to the public in some states.
Anyway, you just have to pay the sales tax once, so if
you buy materials tax-free you have to make something
and sell it and collect tax within a certain period, probably
the tax year, but the specifics your accountant can advise
you on.

A non-CPA accountant will probably charge you less for 
the consulting and help with the paperwork, if that 
matters to you.

Obeying noise ordinances is a good idea, especially with
the routers and portable planers and benchtop table 
saws.


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## MNgary (Oct 13, 2011)

I'm guessing that either way you will be operating out of your home.

One difference is the cost of insurance. As a hobby the cost is significantly lower, may not even exist if you already have an umbrella policy.

If a business the IRS allows depreciation on equipment and a proportionate purchase price of the home. A portion of property taxes (if you rent, a proportion of the rent) become deductible. In addition, costs related to remodeling the shop space become deductible. Business-related insurance is deductible. Heat, electricity, water, and garbage removal for the proportion of your residence that's the shop are deductible. However, personal use of the workshop and materials affects the total percentage that may be deducted. E.g., 15% of the house is business-related, but 30% of production is for personal use . . .

Be aware, though, that when you declare a portion of owned property as a business, you may incur a capital gain tax obligation when you sell your home.

Some Dutch uncle advice: my personal experience for running a business out of my home resulted in four consecutive years of IRS tax audits which cost me, over the four years, a total of $52.16 including interest and penalty. But the emotional costs for each audit - priceless.


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## wormil (Nov 19, 2011)

Business licences are usually required by local (town/city/county) governments, state and feds just want you to pay taxes.


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## MoPower (Feb 6, 2009)

In Alabama it's $5000 per year, it used to be the same in Florida but I'm not sure now.


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## dhazelton (Feb 11, 2012)

A couple of thousand in profit isn't much, and if you have to pay H&R Block per form to do your taxes you'll lose a chunk of that. Do you need to claim the income for credit purposes or want to bump up your Social Security? Then claim the income. If you don't think it will ever get any bigger I say just reinvest it in tools or buy groceries. If you get paid from an LLC you may want to claim it to be on the safe side.


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## HalDougherty (Jul 15, 2009)

My home based hobby/business is an extension of my farm (hay field) and in Tennessee you can put up a roadside stand and sell your farm produce or crafts without a license or collecting taxes. The state has a certificate of tax exemption you can get for a farm or timber harvesting business so you don't have to pay sales tax. I've not applied for it because then you get into record keeping requirements and I'd rather pay sales taxes up front and not deal with the red tape involved. Here's a website the state has to give you some ideas that you can research to see if your state has anything similar.

http://news.tn.gov/node/1796 
http://tn.gov/revenue/faqs/salesandusefaq.shtml

Who would have ever thought a custom rifle stock is a farm related product?


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## krisrimes (Jun 17, 2011)

I appreciate all of the insight. I guess I will have to go a talk to an accountant. I really don't need the income, I just do it to stay in the shop building stuff. Don't get me wrong it is nice to be able to pay for the tools I want or "need" with the money, but I do not want to get wrapped up in getting audited for four years like MNgary did.


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## Sawkerf (Dec 31, 2009)

Good move on the accountant. He/She can probably help you with the rules specific for your location as well as give you some strategies to legally avoid or minimize your involvement with the government.

Being in business isn't really all that difficult. There's some record keeping necessary, but a decent financial program like Quicken can eliminate most of the hassle. It can also tell you if your're really self sustaining - or just kidding yourself like a lot of people do. It's much easier to operate a self sustaining hobby than to start the next Google. - lol


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## krisrimes (Jun 17, 2011)

I know that if I started a business it would be hard to turn a profit. I guess my worries are more am I going to find myself in trouble then am I going to be able to retire on woodworking.


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## Tennessee (Jul 8, 2011)

You don't need an accountant, you need a lawyer. My lawyer was able to set me up as a Sole Propriatorship, get my licenses, (city, county, federal sales and use ID number), and got me lined me up with a good independent insurance agent. Total cost? $200 + licenses, which were cheap. My insurance which covers everything from people getting hurt with my instruments to someone tripping in my shop to my neighbor getting his dog hurt if he happens to stop by and the dog gets a splinter, was only $500 a year.
Now I have my proper licenses, and I am insured with the hanging licenses(s) in my home shop. My house insurance policy has been amended and reduced to accept the business insurance, and I can go anywhere and be safe. Now my tax return looks much cleaner, and it doesn't make any difference how much I make.
By the way, in Tennessee where I live, $400 a month profit is the breakoff point between "additional income", and business profit.


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## dbray45 (Oct 19, 2010)

In Maryland, $60.00 for business license. You have to turn a profit to be considered a business in Maryland - then they want your money.

If you want to deal with places like Graingers, you will need a business license. The filing is different and the way you make things are different as a business versus a hobby. It can be a "careful what you ask for". As a bussiness, you will come under OSHA (Safety) and EPA (fumes and the like) regulations where a hobby, you do not. Most of the regulations you should be following anyway but as a business, you are required to.

Just sayin


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## bobsmyuncle (Jan 12, 2011)

Wormil has it right:
"Business licences are usually required by local (town/city/county) governments, state and feds just want you to pay taxes."

These are highly variable based on your location.

Income tax is a separate matter. Wife is a CPA and off the top of her head she said you can offset income by expenses as a "hobby" but only to zero, not a loss to offset other income. If you are in "business" you technically need to have a profit in 3 of 5 years, or the IRS considers it a hobby (see above).

When I started my business, I found this of tremendous help:
http://www.amazon.com/Small-Time-Operator-Business-Trouble/dp/1589796640/ref=sr_1_1?s=books&ie=UTF8&qid=1337636744&sr=1-1 that has been around for a long time and gets revised every year or two.,

Also I got a few of the Nolo Press books with guidelines and forms, and of course Quickbooks to run the accounting. I run an on-site service business and have to report sales tax separately by each of the 5-7 counties where the service is performed on each month. I also have some tax-exempt clients and work in 3 states.

Having a business license does have some perqs. You can get into some stores that you otherwise can't, you might get discounts, and you may not have to pay sales tax on materials you are going to use in production. However, it puts the state on notice you are doing business and they are going to keep their eye on you for tax purposes.

In my city, you also have to file with the city for a "home-based business." There is no charge for this, they just want to know. There are also all sorts of restrictions to keep residential character in residential zone, for example, no signage, no separate buildings, no storing business stuff in the garage, limited customer and delivery vehicles, only certain % of space allocated to business. And of course, this is highly variable via your city council, township trustees, zoning boards, etc.


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