First off, I am not a lawyer and this is not tax advice. I'm answering this question for me and sharing with you what I've found.
I'm sort-of new to converting old media to new digital forms, but I'm not new to digital technologies. I've been doing that part for years. What I'm new to is methodically capturing memories from deteriorating analog media and preserving it for future generations. I've worked out a process through trial and error (and the hints and tricks of several YouTubers that I'll credit in future posts) that allows me to have a pretty decent end product. Friends and family know that I have the ability to do this, and they have old videos they want preserved, so, they ask me if I will do it for them. To this point I have not provided this service to anyone outside of family. I am brand-new at this.
Here's where I think the process gets tricky - if I convert the videos and get paid for it, do I have to report this as income? What's the difference between a doing this as a hobby and doing it as a business?
I don't know about you, but I want to keep this as simple as possible. I've got a day job and I don't this to become too much like work. I also don't want to make my income taxes any more complicated than they have to me. This is definitely a hobby for me. But what do you do if your hobby makes money?
The first thing I did was to use my favorite search engine to search the term "IRS hobby". The first hit was an article titled "Five Things to Remember about Hobby Income and Expenses". This article is caveated as "historical content" but still makes a few good points:
- Determine if the activity is a business or a hobby - there's another IRS article that provides more detail on this topic that I'll mention below.
- Allowable hobby deductions - I didn't know that!
- Limits on hobby expenses - Apparently hobbies can lose money that can be deducted. I'd never thought of a hobby being profitable, so this is interesting...
- How to deduct hobby expenses - The IRS has a form for this.
- Use IRS Free File
Let's revisit point 1 - Determine if the activity is a business or a hobby. The IRS addresses the question of "Earning side income: Is it a hobby or a business?" in this article. Here the IRS lists nine criterion:
- Whether the activity is carried out in a businesslike manner and the taxpayer maintains complete and accurate books and records. In my case, being brand-new to this activity, the answer is a definite "no". I did set up this website and create a snazzy 80s-looking logo, but I haven't marketed this capability other than a post or two on social media sharing some of the home videos I've converted with family members.
- Whether the time and effort the taxpayer puts into the activity show they intend to make it profitable. My answer again is "no". I don't want to lose a lot of money in converting old videos, but I'm not really looking to make any money off of it, either. It would be nice to cover the costs of hardware and such, but I don't expect much more than that.
- Whether they depend on income from the activity for their livelihood. Again, this one's a "no".
- Whether any losses are due to circumstances beyond the taxpayer's control or are normal for the startup phase of their type of business. I have no idea, but I wouldn't expect any losses. My "startup" costs so far have been minimal because I had almost all the old hardware needed already.
- Whether they change methods of operation to improve profitability. I don't think I'd change methods of operation to improve profitability, but I will definitely adapt from lessons-learned to have higher quality output.
- Whether the taxpayer and their advisors have the knowledge needed to carry out the activity as a successful business. I think I can answer yes on this one. Business degrees have to count for something.
- Whether the taxpayer was successful in making a profit in similar activities in the past. A big "no" here as well.
- Whether the activity makes a profit in some years and how much profit it makes. No past periods of performance to evaluate this one against.
- Whether the taxpayers can expect to make a future profit from the appreciation of the assets used in the activity. I don't see the assets used in this activity appreciating financially. They may become rare by virtue of most folks tossing similar old electronics, but I don't see them really getting more valuable. And -- the end product, converted audio and videos -- really only have value, and sentimental value at that, to specific individuals.
Another enlightening article I found to help me understand the difference in a hobby and a business was published on the Fast Company website over a decade ago. In it the author discusses whether or not one has to get a business license and so forth, what tax forms have to be filed, and if you have to pay sales tax. The key point in the article for me was what the author had to say about filing a Schedule C or Schedule C-EZ on personal taxes for income earned from the activity:
In order to file a Schedule C-EZ you will need to have less than $5000 in sales and have a net profit. Some micro business with limited sales and few expenses to deduct simply book the full sale as miscellaneous income on their 1040 but that avoids Self Employment Tax which can come back to bite you in a tax audit.
All of that being said…most businesses your size fly “Under the Radar” when they first start. I have spoken with many tax accountants and attorneys about this issue and the magic number seems to be around $5000 in sales. If you reach that point everything should be above the table so to speak (understand that this is not legal and/or tax advice…I am just noting that it happens).
There are several other good articles that I've found on the topic as well:
- How the IRS Decides If Your Hobby Is a Real Business
- IRS Hobby Loss Rules: Deductions for Doing What You Love
- Hobby Loss Tax Deduction Developments In 2021
- It’s going to become harder to avoid telling the IRS about income from selling stuff online. Here’s what to know
Under current rules, individuals who sell goods or services via platforms like Uber, Ebay, Etsy and others that use third-party transaction networks (i.e., PayPal) generally only receive a tax form if they engage in at least 200 transactions worth an aggregate $20,000 or more. That form, called a 1099-K, also goes to the IRS.
Starting next year, the federal threshold for issuing the 1099-K will drop to $600 with no minimum transaction level, due to a provision in the recently enacted American Rescue Plan Act. (Some states already have lower minimums.)
This means that in early 2023, you could receive a 1099-K for online sales you make in 2022. And this would be the case whether you’re an occasional seller or are operating as a business, as long as you sold more than $600 worth on a single platform. It doesn’t necessarily mean you’d be taxed on the money, but you would need to account for it on your tax return.
Another interesting nugget from that article is:
If your sales are akin to having a garage sale — i.e., you unload belongings for less than what you originally paid — there typically is no reason to report what you pulled in, said Weston at the American Institute of CPAs. Essentially, there is no “income” to report.
And:
Generally speaking, if you’re selling to make a profit for reasons that go beyond nurturing a hobby, you probably would be considered a business owner for tax purposes. For instance, if you regularly buy clothes at yard sales (or other discounted spots) and sell them — whether online or not — with the intent of making a profit, that counts.
The big take-away for my new hobby is that if I want to keep it fun and not a tax headache, I need to just keep it to myself. The online providers of similar services have nothing to worry from me. I'm confident that I can do it as well as they do, but I have no interest in making a profit off of it. For me, there is a thrill in saving some mundane video footage that would be lost to time so that someday, someone somewhere can see something really interesting about a loved one that would never be known otherwise.
