[Jewelry making - Article 01027] - Re: [Orchid] How to close up a business

[Kimberly Starbard]

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Hi

    Well, it looks like I got the tests mixed up between hobby vs.
    business and passive vs. active activity. 

    One of the tests for determining whether an activity is passive or
    active (passive losses can only be taken in as much as one has
    passive gains) is "did you materially participate in the activity for
    more than 500 hours during the year?" 

    There are several other tests which you can read about
    herehttp://www.irs.gov/publications/p925/ar02.html#d0e3885 

    The test for whether or not you should consider yourself a hobby or
    a business is.....did you spend enough time during the year working
    on this activity that you consider it a business? This is, of course,
    very subjective. 

    Personally, if I were ever asked whether I am a hobby or a business,
    I would say business because.... 

    I spend a good portion of my time working on it 

    I keep adequate records 

    I file the appropriate sales/use tax and Schedule C 

    I have business cards, stationary, a website, a business checking
    account, and a credit card which I use primarily for the business
    Though rejected in previous years, I apply to several shows and I
    intend to make a profit 

    http://www.irs.gov/businesses/small/article/0,,id=98703,00.html 

    The above link is the original one posted to the person who has to
    close up shop due to injury. What I wanted to point out was to be
    careful of prior depreciation taken. Since she said she had mainly
    had losses up to that point, I guessed that she probably had spent
    some or all of her gain (if any) on acquiring equipment/tools. If sec
    179 was taken for this, and business use nows drops to below 50%, the
    IRS's stance is that one must "give back" (called recapture) some or
    all of prior depreciation 

    An example to clarify... 

    I want to start a business so I set myself up with a bench. I spend
    3500 dollars and I take all of this 3500 dollars as an expense
    (under sec 179) in my first year of business. In the second year of
    business, I find out how hard it is to really get started and decide
    to go back to my old job. Should I really be able to keep that 3500
    expense? Maybe. 

    As always, these are issues to be handled by a qualified CPA 

    Sorry about the mix up. 

Kim Starbard
http://www.kimstarbarddesigns.com
http://www.covebeads.etsy.com
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