question for scrapping "hobbyists": how to pay less taxes?

**Dumpster-Dee** · 06-08-2011, 07:20 AM

then do you still get a business license ?

**Mick** · 06-08-2011, 07:33 AM

Originally Posted by Dumpster Dee

then do you still get a business license ?

Having a business license is not related to taxes (except that you can deduct the cost of the license from your taxes). One is a State function; the other is federal. You can do one and never do the other. And it's no easier nor harder to get caught without either. By filing taxes as a business (even as Sole Proprietor), you can pay LESS taxes by showing a Business Loss which then lowers your taxes on your other income. I've done this by various means; including deducting the cost of the trailer in one year (it was a high income from scrap year) rather than depreciating over five years.

**ilyaz** · 06-08-2011, 11:06 AM

Originally Posted by Mick

Having a business license is not related to taxes (except that you can deduct the cost of the license from your taxes). One is a State function; the other is federal. You can do one and never do the other. And it's no easier nor harder to get caught without either. By filing taxes as a business (even as Sole Proprietor), you can pay LESS taxes by showing a Business Loss which then lowers your taxes on your other income. I've done this by various means; including deducting the cost of the trailer in one year (it was a high income from scrap year) rather than depreciating over five years.

Mick, so let me see if I am reading this right. If I have a regular W-2 from my day time job then I file 1040 without any mention of the scrap income. Then, I also fill out a separate return for a business even if I don't have any business license and report all my scrap income and related expenses there. Right?

Now, here's the tricky part: if I claim more expenses than income and so get a net loss, I get to write the loses off and might actually get a refund instead of paying additional taxes, correct? I heard somewhere that you write off loses like that only for the first couple of years your business is mentioned in your tax forms.

Or am I interpreting this wrong?

Thanks!

**Mick** · 06-08-2011, 11:35 AM

Originally Posted by ilyaz

Mick, so let me see if I am reading this right. If I have a regular W-2 from my day time job then I file 1040 without any mention of the scrap income. Then, I also fill out a separate return for a business even if I don't have any business license and report all my scrap income and related expenses there. Right?

Now, here's the tricky part: if I claim more expenses than income and so get a net loss, I get to write the loses off and might actually get a refund instead of paying additional taxes, correct? I heard somewhere that you write off loses like that only for the first couple of years your business is mentioned in your tax forms.

Or am I interpreting this wrong?

Thanks!

That is absolutely correct, legal and common. The IRS expects that there will be a Business Loss for several years in any startup (guidelines USED to be no more than three years out of five, but no longer if you can show certain sincere attempts at showing a profit). Business income and loss is documented on Schedule C and the income or loss is transferred to your 1040 as ordinary income (Loss would reduce taxable income). Having a Business license is not relative. The IRS is only interested in "Did you operate a business during XXXX (year)?" If you consistently show a Business Loss year after year, the IRS MAY question it and make a determination that you operate a hobby, but you will have a chance to show you did attempt to make a profit. Hobbies are still reported as income, but not allowed to show a Loss.