4

So here is my situation in a nutshell. My wife does theater productions as a hobby with no reasonable expectation to make a profit on the enterprise. She does, however, sell tickets with the intent to cover the expenses and generally only charges enough to break even.

So she had about $3k in ticket sales last year which didn't quite cover expenses. I'm not looking to deduct the entire loss. I just would prefer that since we didn't actually have any net income from the whole affair that I don't incur a tax liability.

So here is the problem.The deduction for hobby expenses (Misc income) is limited to 2% of AGI threshold. So only the expenses in excess of that limit can be deducted, which is way more than the $3k in expenses. So what that means is the entire $3k in revenue is treated as pure profit and taxable to the tune of roughly $900 on a hobby that LOST money in the year. I'm not trying to use the loss to offset other income, but it seems patently unfair that I have to pay $900 in taxes on a hobby that not only didn't generate income, it COST me money on aggregate.

Given that I don't expect to make money on this hobby any time in the future I don't think I can recharacterize it as a business to help myself out. Is there anything else I can do to avoid this $900 hit on my income taxes on phantom profits?

5

I suggest to start charging slightly more than needed to cover expenses. All you need is to show profit. It doesn't have to be significant - a couple of hundred of dollars of consistent yearly profit should suffice to show a profitable business.

Then you can deduct on Schedule C all the related expenses.

The caveat is that the profit (after the deduction of the expenses will be a bit smaller) will be subject to not only income tax but also the self-employment tax. But at least you'll pay tax on profit that is not entirely phantom.

I remember suggesting you getting a professional consultation on this matter a while ago. You should really do that - talk to a EA/CPA licensed in your state, it may be well worth the $100-200 fee they'll charge for the consultation (if at all...).

  • Couldn't I just as easily show a profit by not claiming all the expenses? – JohnFx Feb 15 '14 at 15:34
  • @johnfx see recent thread on not claiming all deductions. Can't / shouldn't do that. – JoeTaxpayer Feb 15 '14 at 17:22
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    Thanks. BTW: Contacted a CPA. I think it is finally time to give in and realize that Me+TurboTax ain't gonna cut it anymore. – JohnFx Feb 15 '14 at 18:04
  • Can you link to the thread you are talking about? My CPA is advising me that I can re-characterize expenses as personal so that I can show a profit to meet the 3 of 5 year profitability test for whether an endeavor is a business or hobby. – JohnFx Feb 25 '14 at 0:12
  • @JohnFx I think it got deleted, it was one of the CQM's threads which always are about some shady and borderline scenarios. But one of the things quoted there was the IRS RR that stated that not reporting expenses is in violation of the law. I'd suggest you get that suggestion from the CPA in writing, and if for some reason he's not all that happy to put it on paper - think twice about it. – littleadv Feb 25 '14 at 5:35
5

Does your wife perform solo or in association with other actor/actresses and other volunteers?

The latter arrangement sounds more like an unincorporated association or a partnership, which might be a bit freer to match the revenue and expenses.

By grinding through the proper procedures, it might be possible to get official non-profit status for it, as well.

Ask a professional.

  • She produces the plays and directs them. – JohnFx Feb 15 '14 at 15:35
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    Setting up some sort of separate organization that receives the ticket sales and writes cheques for expenses seems like it should work. Talk to your local community theatre to find out what they had to do. – DJClayworth Feb 16 '14 at 4:50

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