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I am part of a hobby forum and I am running a non-profit group buy. I'm a little worried how that will influence my taxes.

The group buy works as such: One member wants something expensive, so he gets a bunch of other members to get together who want the same item. They all chip in and give the money to the original person, who then makes a bulk purchase at a discount. The original member then distributes the items to the rest of the participants. My example is a non-profit version. Some people choose to charge a small fee for the amount of work that goes into organizing the group buy. That would be a for-profit group buy.

My case involves the following: I'm in the US. I have about 120 people on board for my group buy, and the total money brought in is about $10,000. I set up a Paypal business account to simplify invoicing people for what they order. Each person pays via Paypal, and I make the purchase. Some parts are coming from an international supplier, some are coming from local suppliers. When I receive the goods, they will be sent by mail to the participants. The entirety of what they spent will go toward the purchase from the supplier and the shipping. Some have elected to send me donations to cover any overages/thank me for doing the leg work. All of the money +/- donations is being used for the group, and none of it (outside of whatever is left from donations) will return to me as a profit.

How do I go about explaining this on my taxes?

I'm worried I will get hit pretty hard. From an outsider's perspective, it appears that I have made $10k and then spent it on big purchases. Compared to my actual source of income (grad student), $10k is about 1/3 of what I actually make before taxes.I'm not doing it for profit, so I'm not a business. I currently have no registration as an LLC outside of being signed up for the Paypal Business version of the site, which should not have implications.

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From the poster's description of this activity, it doesn't look like he is engaged in a business, so Schedule C would not be appropriate. The first paragraph of the IRS Instructions for Schedule C is as follows:

Use Schedule C (Form 1040) to report income or loss from a business you operated or a profession you practiced as a sole proprietor. An activity qualifies as a business if your primary purpose for engaging in the activity is for income or profit and you are involved in the activity with continuity and regularity. For example, a sporadic activity or a hobby does not qualify as a business. To report income from a nonbusiness activity, see the instructions for Form 1040, line 21, or Form 1040NR, line 21.

What the poster is doing is acting as a nominee or agent for his members. For instance, if I give you $3.00 and ask you to go into Starbucks and buy me a pumpkin-spice latte, you do not have income or receipts of $3.00, and you are not engaged in a business. The amounts that the poster's members are forwarding him are like this.

Money that the poster receives for his trouble should be reported as nonbusiness income on Line 21 of Form 1040, in accordance with the instructions quoted above and the instructions for Form 1040.

Finally, it should be noted that the poster cannot take deductions or losses relating to this activity. So he can't deduct any expenses of organizing the group buy on his tax return. Of course, this would not be the case if the group buy really is the poster's business and not just a "hobby."

Of course, it goes without saying that the poster should document all of this activity with receipts, contemporaneous emails (and if available, contracts) - as well as anything else that could possibly be relevant to proving the nature of this activity in the event of an audit.

  • That's actually not really helpful to the OP. Consider he actually does have profits, and that the hobby income deductions are limited by the AGI 2% threshold. The OP will probably be better off with Schedule C. – littleadv Oct 19 '15 at 15:22
  • The IRS says not to use Schedule C for this kind of income literally in the first paragraph of its instructions for Schedule C. How will OP be better off by not following the IRS's own guidance on the issue? – Heath Oct 19 '15 at 16:01
  • The IRS can say whatever they want, the taxpayer is the one deciding in this case. As I said - hobby income deductions are limited, Schedule C are not. He has $10K income and almost $10K expenses, but with hobby income his deductible expenses will be lower. – littleadv Oct 19 '15 at 19:06
  • I agree 100% that the tax treatment of business losses is better than hobby losses. That's why when the IRS audits people on this issue, the IRS argues that taxpayers' activities are hobbies, and not the other way around. But taxpayers do not have an election regarding whether their activities are hobbies or businesses--They have to follow the law. If OP reports his group buy as if it's a valid business, then he risks being assessed interest and penalties if the issue ever comes up on audit. – Heath Oct 19 '15 at 21:24
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    @littleadv There is no need for me to take a deduction, my actual income is extremely low and my IRA contributions cover me pretty well. Additionally, according to the IRS Instructions Heath posted, my hobby does not count as a business. I intend to claim the donations received as gifts as miscellaneous income. Donations came from a small percentage of the participants in the group buy, and I stated clearly beforehand that it was not required. Therefore my sole intent in that case was not profit, making it excused from Schedule C. – WesH Oct 20 '15 at 2:41
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You do actually have some profits (whatever is left from donations).

The way it goes is that you report everything on your Schedule C. You will report this:

  1. Gross receipts (line 1) - all the money you got from the group (excluding the money you put in yourself, but including all the "donations").
  2. Cost of goods (line 4) - all the money you spent on purchasing and shipping (excluding the items you kept for yourself)
  3. Gross profits - the difference between the two amounts.

Your gross profits will then flow to Net Profit (line 31) since you had no other expenses (unless you had some other expenses, like paypal fees, which will appear in the relevant category in part II), and from line 31 it will go to your 1040 for the final tax calculation.

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