Money donations to individual - what are the tax laws?

Discussion in 'Tax' started by chiefthracian, Apr 26, 2004.

  1. Hello, I am an activist who has begun accepting donations in
    money, to be used to further my freelance political
    activism. I am doing this on my own...not as a business
    (non-profit or other). All monies will be used ONLY for my
    activism...and I'll keep a record of all donations, and all
    expenses; using a separate (non-interest bearing, no-fee)
    bank account just for this purpose.

    What are my obligations re. paying taxes on these donations?
    I guess that I'd have to treat them as "gifts"...since I am
    NOT working for a non-profit (in which case I believe
    there'd be no tax on monies that do not generate a profit).

    I expect also to accept no-money donations, too...such as
    computer parts and art material. I presume I'd have to make
    a reasonable estimate on the present monetary value of those
    items. Used items would be worth less than new items, of
    course.

    Assuming I will keep tight reigns on my account (no mingling
    whatsoever), and keep everything up front...what are my tax
    obligations? I am totally new to this aspect of
    taxation...so perhaps anyone can direct to a useful (free)
    resource on the web, which would explain this stuff in a
    clear manner?

    TIA!

    --
    Zeke Krahlin, Chief Thracian
    Lavender-Velvet Revolution
    http://www.gay-bible.org

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    chiefthracian, Apr 26, 2004
    #1
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  2. chiefthracian

    Vic Dura Guest

    chiefthracian <> wrote:

    > Assuming I will keep tight reigns on my account (no mingling
    > whatsoever), and keep everything up front...what are my tax
    > obligations? I am totally new to this aspect of
    > taxation...so perhaps anyone can direct to a useful (free)
    > resource on the web, which would explain this stuff in a
    > clear manner?


    I'm not a tax pro, but I would suggest that you use a Sch-C
    for your tax return. Count all cash, and the Fair Market
    Value of non-cash, received as gross income in Sch-C. Enter
    you expenses on Sch-C in the appropriate lines.

    --
    To reply to me directly, remove the XXX characters from my
    email address.

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    Vic Dura, Apr 27, 2004
    #2
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  3. > I am an activist who has begun accepting donations in
    > money, to be used to further my freelance political
    > activism. I am doing this on my own...not as a business
    >
    > I guess that I'd have to treat them as "gifts"...


    You are receiving money to perform the service of political
    activism. Because the donor is expecting something in return
    (activism) for the "donation", the money you receive is not
    considered a gift for tax purposes.

    Therefore, the full amount of money and the fair market
    value of the property that you receive will be fully taxable
    to you. Even though you state this is not a business, tax
    law would treat it as a business. You could deduct any out
    of pocket costs and you will also owe self-employment taxes
    on your net earnings.

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    Hamlet the Prince, Apr 27, 2004
    #3
  4. chiefthracian

    MTW Guest

    chiefthracian <> wrote:

    > Assuming I will keep tight reigns on my account (no mingling
    > whatsoever), and keep everything up front...what are my tax
    > obligations? I am totally new to this aspect of
    > taxation...so perhaps anyone can direct to a useful (free)
    > resource on the web, which would explain this stuff in a
    > clear manner?


    Unless you go to the trouble of setting up (or affiliating
    with) a tax exempt organization, I can't think of a single
    reason why the amounts in question wouldn't represent
    taxable income to you.

    I doubt they qualify as "gifts" for tax purposes because I
    presume that you are actively soliciting the contributions
    and that the donors expect you to do something in return
    (further a "cause," etc.).

    MTW

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    MTW, Apr 30, 2004
    #4
  5. chiefthracian

    Katie Jaques Guest

    "MTW" <> wrote:
    > chiefthracian <> wrote:


    >> Assuming I will keep tight reigns on my account (no mingling
    >> whatsoever), and keep everything up front...what are my tax
    >> obligations? I am totally new to this aspect of
    >> taxation...so perhaps anyone can direct to a useful (free)
    >> resource on the web, which would explain this stuff in a
    >> clear manner?


    > Unless you go to the trouble of setting up (or affiliating
    > with) a tax exempt organization, I can't think of a single
    > reason why the amounts in question wouldn't represent
    > taxable income to you.
    >
    > I doubt they qualify as "gifts" for tax purposes because I
    > presume that you are actively soliciting the contributions
    > and that the donors expect you to do something in return
    > (further a "cause," etc.).


    Mike, would you agree that this is not an activity engaged
    in for profit, and therefore not a Schedule C business?

    I think the gross income is reportable as "other income,"
    and any related expenses are miscellaneous itemized
    deductions subject to the (2.5% of AGI? I'm too lazy to look
    it up <G>) limitation.

    But I could be wrong ...

    Katie in San Diego

    The foregoing is intended for educational purposes only and
    does not constitute legal or professional advice.

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    Katie Jaques, May 5, 2004
    #5
  6. chiefthracian

    MTW Guest

    Katie Jaques <> wrote:

    > Mike, would you agree that this is not an activity engaged
    > in for profit, and therefore not a Schedule C business?


    Hmmm... ~Very interesting!~ But, ultimately I think this
    "fails."

    If the poster has the unfettered ability to withdraw the
    funds and convert them to his own personal use, I'd guess
    that the IRS would hold this to be a "for profit" business
    activity that is subject to both income and SE tax. In order
    to avoid that result, I believe there would need to be a
    VERY secure "Chinese wall" in place, such as a FORMAL trust
    with independent trustees who approve activities,
    expenditures, etc.

    PERHAPS a simple agency agreement would suffice, whereunder
    the poster is required to "account" to the contributor for
    all expenditures and return any unspent funds. But, I'm not
    so sure about that...

    MTW

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    MTW, May 8, 2004
    #6
  7. Thank you EVERYONE here, for your thoughtful answers. I had
    given up on this newsgroup, because no one answered as soon
    as those in "us.taxes". Only today did I check up on latest
    responses to my plea. If you want to read the us.taxes
    thread first, go to:

    And if that thread is way too long to handle properly, you
    can locate it yourself at Google groups, with the following
    stats:

    From: chiefthracian ()
    Subject: Money donations to individual - what are the tax laws?
    Newsgroups: us.taxes
    Date: 2004-04-24

    Or you can go to my 2004 "Zeke Meets Usenet" page, at:

    http://www.gay-bible.org/usenet/2004.htm

    and scroll down to (or search for) the phrase "Money
    donations to individual"; then click on that link.

    I am pretty much set up now, to go the "gift"
    direction...and easily make the switch to "self-employed"
    if/when donations empower me to shed my disability cloak.
    Your idea of having legal witnesses re. how I spend these
    donations, is excellent. However, I have no such contacts,
    nor the resources to acquire them for this purpose.

    However, there is much I can do to prove all expenses went
    directly to my gay activism. I'll be keeping a ledger of
    expenses and donations, updated immediately upon any
    transaction. And this ledger shall be available on my
    website, free for anyone to peruse. Included in this, will
    be scanned receipts of my expenditures. My website alone is
    solid witness to my hobby of persuing gay rights...and if
    taken to court or IRS over this, there certainly ARE folks
    who've known me quite a few years...and as far back as they
    can remember, I've ALWAYS been first and foremost, a gay
    rights activist.

    All monies received as donations, I'll spend EXCLUSIVELY for
    queer activism as I see fit. All items or services donated
    in lieu of money, shall be used EXCLUSIVELY for gayr
    activism as I see fit. I shall keep a LOG (in addition to a
    ledger) of why I used certain tools, and the event in which
    they were just utilized.

    Actually, what monies I see coming in, are rather paltry for
    most people's needs...and thus may never gain the interest
    of the IRS. But as little as $25-75/mo. will EMPOWER me
    greatly in many ways. And what expenses I incur, will only
    result in increasing my resources...which may not be in
    currency, but in items or services of measurable value (and
    which I could exchange for currency).

    And, within 2-5 yrs., my hobby could wind up growing large
    enough in resources, that I could switch to self-employed
    status. But if it doesn't, my books are square anyway...with
    clear, complete records of ALL donations and expenses.

    Thanks again! -Zeke Krahlin
    http://www.gay-bible.org

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    chiefthracian, May 12, 2004
    #7
  8. > I am pretty much set up now, to go the "gift"
    > direction...and easily make the switch to "self-employed"
    > if/when donations empower me to shed my disability cloak.


    This makes NO SENSE. IF the donations are gifts now, they
    will ALWAYS be gifts. If they aren't gifts, then you have a
    hobby which may someday qualify as self-employment if you
    intend to turn a profit. Gifts do not suddenly become
    compensation.

    According to the www.irs.gov, "You make a gift when you give
    property (including money), or the use or income from
    property, without expecting to receive something of equal
    value in return."

    Hamlet the Prince says:
    > You are receiving money to perform the service of political
    > activism. Because the donor is expecting something in return
    > (activism) for the "donation", the money you receive is not
    > considered a gift for tax purposes.


    I disagree at least with your reasoning, even if these are not gifts.
    The donor does not expect to receive something of equal value in
    return for the donation. First, what is the value of the recipient's
    activity? What exactly does a particular donor *receive* *in return*
    for a donation? Which specific actions are services to which donor?
    Is the activist accountable to each donor for what exactly their money
    got them?

    The activist's "services" may provide no specific benefit to
    any individual, may have no impact at all, and aren't
    performed *for* any particular donor, so what exactly is the
    donor getting? And how can it be said to be "in return" for
    their money?

    Look at how this criterion "without expecting to receive
    something of equal value in return" applies to charitable
    donations: If your $3 donation to the Girl Scouts gets you
    a box of cookies worth $3, it's not a gift, it's simply a
    purchase. But if you give $3 to Planned Parenthood knowing
    that they're going to use that money to carry out activities
    of which you approve, even if you think these activities may
    benefit you in some way, it's a gift. You're paying for
    something, yes, but you aren't personally receiving anything
    *in return* and *of equal value*. The fact that the
    activist isn't a qualified charitable organization just
    means the gift isn't tax deductible; it does not mean that
    it isn't a gift.

    If I give my neighbor kid a piano knowing I'll enjoy hearing
    him play it, does that make it not a gift?

    If you all think these can't be gifts, there must be some
    other reason or a regulation that specifically excludes
    them; can someone provide me a reference?

    MTW writes:

    > If the poster has the unfettered ability to withdraw the
    > funds and convert them to his own personal use, I'd guess
    > that the IRS would hold this to be a "for profit" business
    > activity that is subject to both income and SE tax.


    It doesn't matter if you have unrestricted access to the
    funds if you don't come out ahead at the end of the year.
    If you don't turn a profit, there's no way the IRS would
    call this a for-profit business. If you had losses from the
    activity, they would be disallowed. If you have no profit
    motive and no profit, you better not file a Schedule C.

    If there's something that prevents these from being gifts,
    you have hobby income. You say on us.taxes that your
    donations will never exceed your expenses—if those expenses
    include only those required for the activity that draws the
    money and no personal living expenses, then you will not
    have a profit (to avoid having a profit, your expenditures
    during the tax year must meet or exceed the donations you
    received during that year). This means you will not be
    self-employed, and you MAY NOT file Schedule C. You would
    report the hobby income as Other Income on your 1040 and
    deduct the expenses on Schedule A, subject to a trim equal
    to 2% of your adjusted gross income. Unless you have other
    expenses in this part of Schedule A, this means that the
    donations you receive would only increase your income by
    about 2% of the donations. That means that $1000 in
    donations adds about $20 to your income; if you're in the
    15% tax bracket the tax you'd end up paying on $1000 in
    donations is only $3. If you do have other expenses in this
    part of Schedule A, the additional $1000 reported may have
    virtually no impact on your taxes (there may be some impact
    from the increase in your AGI, which is used in some other
    calculations, but I doubt you'd even notice).

    If you claim the standard deduction instead of itemizing,
    your donations will impact your taxes, to the effect of
    being fully taxable.

    If you filed a Schedule C, which you may not, the donations
    would impact your taxes even less, because there would be no
    2% trim, all your expenses would be deductible against the
    donations, and you'd have 0 income to enter on your 1040,
    which means your AGI wouldn't even be affected. If you
    started making a profit—meaning, each year your donations
    exceeded your expenses, then you could file a Schedule C and
    pay tax on the excess.

    The activist repeatedly asks on us.taxes:
    > I'd just pay the taxes by considering these donations
    > as "gifts". Does that sound right?


    No. You do not pay any taxes on gifts you receive. That is
    why people are telling you that you may not treat these as
    gifts because IF they don't qualify as gifts, you have to
    report them as income so the IRS can get their share.

    You also repeatedly mention (on us.taxes) that a business is
    required to turn a profit after three years. There is no
    such requirement. Turning a profit in 3 out of 5 years (or
    is it 2 out of 5? I can't remember) means that the IRS will
    assume that the activity is for-profit, and you don't have
    to do anything else to prove it. It's possible to never
    turn a profit and still be considered a for-profit business.
    The main requirement for being a business, according to the
    IRS, is profit motive, which you don't have.

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    Sassy Baskets, May 14, 2004
    #8
  9. chiefthracian

    Katie Jaques Guest

    "MTW" <> wrote:
    > Katie Jaques <> wrote:


    >> Mike, would you agree that this is not an activity engaged
    >> in for profit, and therefore not a Schedule C business?


    > Hmmm... ~Very interesting!~ But, ultimately I think this
    > "fails."
    >
    > If the poster has the unfettered ability to withdraw the
    > funds and convert them to his own personal use, I'd guess
    > that the IRS would hold this to be a "for profit" business
    > activity that is subject to both income and SE tax. In order
    > to avoid that result, I believe there would need to be a
    > VERY secure "Chinese wall" in place, such as a FORMAL trust
    > with independent trustees who approve activities,
    > expenditures, etc.
    >
    > PERHAPS a simple agency agreement would suffice, whereunder
    > the poster is required to "account" to the contributor for
    > all expenditures and return any unspent funds. But, I'm not
    > so sure about that...


    So you think if his expenditures exceed the support he gets,
    he can deduct the loss on Schedule C??

    Katie

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    Katie Jaques, May 14, 2004
    #9
  10. (Sassy Baskets) writes:

    > report the hobby income as Other Income on your 1040 and
    > deduct the expenses on Schedule A, subject to a trim equal
    > to 2% of your adjusted gross income. Unless you have other
    > expenses in this part of Schedule A, this means that the
    > donations you receive would only increase your income by
    > about 2% of the donations. That means that $1000 in
    > donations adds about $20 to your income;


    How do you figure that? Lets say he has $1000 in
    "donations" and $1000 in expenses. The $1000 of income
    goes on "Other Income" of 1040 and the expenses are
    misc expenses subject to the 2% of AGI reduction.
    Unless these "donations" are virtually the only
    income he has, the 2% rule will eliminate virtually
    all of the "raw" $1000 of expenses -- so the $1000
    in "donations" will increase his taxable income by
    almost $1000.

    Now, if he DOES already have a bunch of misc
    itemized deductions, then he'll have the result
    you describe.

    --
    Rich Carreiro

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    Rich Carreiro, May 14, 2004
    #10
  11. (Sassy Baskets) wrote:

    > This makes NO SENSE. IF the donations are gifts now, they
    > will ALWAYS be gifts. If they aren't gifts, then you have a
    > hobby which may someday qualify as self-employment if you
    > intend to turn a profit. Gifts do not suddenly become
    > compensation.


    Okay, I think I'm confusing the issue by using terms "gift"
    and "hobby" interchangeably. But that's because I'm not
    going by IRS legalese. Someone donates for my hobby...that's
    a gift. But for tax form issues, they are two different
    matters. You are right, using IRS terminology, I'm receiving
    donations for my HOBBY.

    > According to the www.irs.gov, "You make a gift when you give
    > property (including money), or the use or income from
    > property, without expecting to receive something of equal
    > value in return."


    Well, that does match up with donations people give me. In
    that sense, clearly it's a gift...though not for a business;
    it's for my hobby.

    > If there's something that prevents these from being gifts,
    > you have hobby income. You say on us.taxes that your
    > donations will never exceed your expenses—


    Okay, I am finally seeing the light at the end of the IRS
    tunnel. :)

    I'm still not clear on why gifts can't be called that, even
    though I'm a hobbyist, not a business. Technically, "gift"
    is defined as monies or items donated to a business w/o
    expection of services rendered in return? But if this same
    donation is given for someone's hobby, it wouldn't be termed
    a "gift", but a "hobby" income?

    > if those expenses
    > include only those required for the activity that draws the
    > money and no personal living expenses, then you will not
    > have a profit (to avoid having a profit, your expenditures
    > during the tax year must meet or exceed the donations you
    > received during that year). This means you will not be
    > self-employed, and you MAY NOT file Schedule C. You would
    > report the hobby income as Other Income on your 1040 and
    > deduct the expenses on Schedule A,


    THANK YOU! So I go for 1040. Now, I'm getting somewhere.

    > No. You do not pay any taxes on gifts you receive. That is
    > why people are telling you that you may not treat these as
    > gifts because IF they don't qualify as gifts, you have to
    > report them as income so the IRS can get their share.


    Ah, I see. So the definition of "gift" only applies for
    businesses. If money is received for a hobby, it's not
    termed a gift. In addition to a hobby, I can see just
    someone giving another a money gift just for the heck of
    it...and I presume would be taxed ('cause it wasn't given as
    a hobby.)

    > You also repeatedly mention (on us.taxes) that a business is
    > required to turn a profit after three years. There is no
    > such requirement.


    I see. It's not mandatory to turn a profit after three
    years; I just thought it was.

    --begin quote from http://www.toolkit.cch.com/text/P07_2112.asp:

    "An activity is presumed to be engaged in for profit and not
    to be a hobby, if it is profitable in three out of five
    consecutive years. For a new business, this means that you
    don't have to show a profit for your first two years."

    --end of quote

    Perhaps I'm just stuck on phrase "HAVE to show".

    > The main requirement for being a business, according to the
    > IRS, is profit motive, which you don't have.


    Okay, so it's to the 1040 I go. Thanks immensely,
    "sassybaskets".

    If you or anyone else cares to add further comments, let me
    provide a likely scenario for my 2004 (non-employment)
    income:

    Social Security: $10,000
    Donations: $ 500


    I'm a single person, declaring no dependents, BTW. Also, I
    don't own a home, a car, hold any stock, or possess any
    other item of value. And the only bank account I have is for
    my social security.

    These donations include estimated value of items donated in
    lieu of cash...as well as cash contributions. Example:

    Someone donates a used PC (case, mobo, 633MHz CPU, 128mb
    RAM, 80gb HD, CD-ROM drive), which is three years old. I
    estimate its value as $300. The remaining donations are all
    in cash ($200).

    Now, estimating the value of a donated item is another
    kettle of fish; but that's not my question for now, so let's
    just let that matter slide. (I'll post THAT issue in a
    separate thread, as well as another question I have).

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    chiefthracian, May 17, 2004
    #11
  12. Rich Carreiro <> wrote:
    > (Sassy Baskets) writes:


    >> report the hobby income as Other Income on your 1040 and
    >> deduct the expenses on Schedule A, subject to a trim equal
    >> to 2% of your adjusted gross income. Unless you have other
    >> expenses in this part of Schedule A, this means that the
    >> donations you receive would only increase your income by
    >> about 2% of the donations. That means that $1000 in
    >> donations adds about $20 to your income;


    > How do you figure that? Lets say he has $1000 in
    > "donations" and $1000 in expenses. The $1000 of income
    > goes on "Other Income" of 1040 and the expenses are
    > misc expenses subject to the 2% of AGI reduction.
    > Unless these "donations" are virtually the only
    > income he has, the 2% rule will eliminate virtually
    > all of the "raw" $1000 of expenses -- so the $1000
    > in "donations" will increase his taxable income by
    > almost $1000.
    >
    > Now, if he DOES already have a bunch of misc
    > itemized deductions, then he'll have the result
    > you describe.


    Whoops. Sorry, should've said "2% of gross income," not "2%
    of the donations". That would change things, wouldn't it?

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    Sassy Baskets, May 17, 2004
    #12
  13. Sassy Baskets <> wrote:

    > If there's something that prevents these from being gifts,
    > you have hobby income. You say on us.taxes that your
    > donations will never exceed your expenses—if those expenses
    > include only those required for the activity that draws the
    > money and no personal living expenses, then you will not
    > have a profit (to avoid having a profit, your expenditures
    > during the tax year must meet or exceed the donations you
    > received during that year). This means you will not be
    > self-employed, and you MAY NOT file Schedule C. You would
    > report the hobby income as Other Income on your 1040 and
    > deduct the expenses on Schedule A, subject to a trim equal
    > to 2% of your adjusted gross income.


    That makes no sense. Consider the following cases:

    Base: Taxpayer has $100K earned income. He has a hobby.

    Case 1: Hobby has $10,001 expenses, $10K income. According
    to you, only $10K - 2% x $110,001 = $7800 of the expenses is
    deductible, so he pays taxes on $102,200.

    Case 2: Hobby has $9,999 expenses, $10K income. Now it goes
    on schedule C, so he pays taxes on $100,001.

    Somehow, his expenses dropping by $2 _decreasing_ his
    taxable income by $2,199 doesn't make sense.

    I'm not sure how to handle Case 1. I think I would create a
    Schedule C and not file it; if the IRS tries to claim it's a
    busines, then I'll file it and they can give me a refund.

    Seth

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    Seth Breidbart, May 17, 2004
    #13
  14. chiefthracian

    MTW Guest

    Katie Jaques <> wrote:

    > So you think if his expenditures exceed the support he gets,
    > he can deduct the loss on Schedule C??


    No, I didn't say that. <g> As Mr. Zollars recently noted in
    an unrelated thread, the so called "hobby loss" rules and
    the SE tax rules are not necessarily one and the same. While
    they often might appear to work in concert, they don't
    necessarily have to.

    If this activity is engaged in on a regular and continuous
    basis, and involves the personal services of the taxpayer, I
    can't think of a single reason why it would not be subject
    to self-employment tax if a "profit" results. I don't think
    you can avoid SE tax on a profitable endeavor by simply
    asserting that you didn't ~intend~ to generate a profit.

    If the activity generates a loss, then SE tax isn't
    immediately at stake. And, whether it flunks under the hobby
    loss rules would probably take a few years of experience to
    judge.

    And, while we're talking about profit or loss, lets not
    overlook the IRC 162(e) prohibition against deduction of
    "lobbying expenses" (some exceptions apply) UNLESS the
    taxpayer is engaged in the (ahem!) "trade or business" of
    being a lobbyist. So, if the taxpayer IS a lobbyist, he
    would presumably be fully entitled to deduct his losses.
    OTOH, if he is NOT a lobbyist, it is likely that some or all
    of his expenses are not deductible IN ANY EVENT (thus, he
    might have a "profit" for tax purposes whether he likes it
    or not). All of this seems to boil down to the ever illusive
    concept of "trade or business."

    By the way, my comments are based SOLELY on the information
    that has been posted in THIS NEWSGROUP. I will make
    absolutely no effort whatsoever to explain, justify or
    reconcile my comments with information that has been posted
    in OTHER newsgroups.

    MTW

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    MTW, May 17, 2004
    #14
  15. (Hamlet the Prince) wrote:

    > Therefore, the full amount of money and the fair market
    > value of the property that you receive will be fully taxable
    > to you. Even though you state this is not a business, tax
    > law would treat it as a business. You could deduct any out
    > of pocket costs and you will also owe self-employment taxes
    > on your net earnings.


    Thank you! The IRS should not treat a hobby as a business,
    unless it is obvious that I'm also making a profit. I just
    don't want to report donations as "business" income, as that
    would be a lie. I don't mind being taxed the same amount as
    a business, but to report my endeavors as a business would
    be incorrect.

    I've done some more research, and have just posted a
    separate reply to this thread...hopefully, with better
    clarity.

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    chiefthracian, May 18, 2004
    #15
  16. Vic Dura <> wrote:

    > I'm not a tax pro, but I would suggest that you use a Sch-C
    > for your tax return. Count all cash, and the Fair Market
    > Value of non-cash, received as gross income in Sch-C. Enter
    > you expenses on Sch-C in the appropriate lines.


    Schedule C is for a business. I am not a business, but a
    hobbyist, receiving donations to pursue my hobby. So I don't
    want to report myself as a business, as that is just not the
    case. I DO want to report my donation income in the right
    manner.

    I've been researching since my original post, and have just
    posted another article here, to clarify what I am trying to
    figure out. Thanks for you help.

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    chiefthracian, May 18, 2004
    #16
  17. >> This means you will not be
    >> self-employed, and you MAY NOT file Schedule C. You would
    >> report the hobby income as Other Income on your 1040 and
    >> deduct the expenses on Schedule A, subject to a trim equal
    >> to 2% of your adjusted gross income.


    > That makes no sense.


    Who says it has to make sense? It is the tax law.

    > Consider the following cases:
    >
    > Base: Taxpayer has $100K earned income. He has a hobby.
    >
    > Case 1: Hobby has $10,001 expenses, $10K income. According
    > to you, only $10K - 2% x $110,001 = $7800 of the expenses is
    > deductible, so he pays taxes on $102,200.
    >
    > Case 2: Hobby has $9,999 expenses, $10K income. Now it goes
    > on schedule C, so he pays taxes on $100,001.
    >
    > Somehow, his expenses dropping by $2 _decreasing_ his
    > taxable income by $2,199 doesn't make sense.
    >
    > I'm not sure how to handle Case 1. I think I would create a
    > Schedule C and not file it; if the IRS tries to claim it's a
    > busines, then I'll file it and they can give me a refund.


    Fact: Most people with hobby income get screwed on the expenses.

    How about this one:
    Person on SS loses life savings of $150,000 at a casino and
    has one big reportable jackpot of $100,000 so he walks out
    $50,000 in the hole. Only other income is Social Security
    of $24,000. AGI is $120,400 because Social Security income
    is 85% taxable as a result of the gambling winnings. The
    $100,000 deduction for gambling losses (only to the extent
    of winnings) does not come off until the second page of the
    1040, leaving income of $20,400, probably more because of
    the limitation of itemized deductions, if he is single. If
    the person had never gone to the casino, he would not have
    paid a cent of tax on his social Security.

    What does sense have to do with it?

    All freely provided advice guarantee correct or double your
    money back

    Frank S. Duke, Jr. CPA
    Cincinnati, OH USA

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    Frank S. Duke, Jr., May 19, 2004
    #17
  18. chiefthracian <> wrote:
    > Vic Dura <> wrote:


    >> I'm not a tax pro, but I would suggest that you use a Sch-C
    >> for your tax return. Count all cash, and the Fair Market
    >> Value of non-cash, received as gross income in Sch-C. Enter
    >> you expenses on Sch-C in the appropriate lines.


    > Schedule C is for a business. I am not a business, but a
    > hobbyist, receiving donations to pursue my hobby. So I don't
    > want to report myself as a business, as that is just not the
    > case. I DO want to report my donation income in the right
    > manner.


    You can call it what you like. But if the IRS decides to
    call it a business, you will have to present facts that show
    it is a hobby (thus exempt from SE tax) rather than a
    business. Your assertion that it is a hobby and not a
    business will carry little weight compared to the facts.

    If you engage in it regularly and with the purpose of
    generating a profit (which includes generating funds you can
    then use in a personal activity, such as political
    activism), I'd say it looks like a business, and you have to
    treat it as a business.

    If you engage in it sporadically, and especially if your
    annual net is under the $433 threshold for SE tax, then you
    might be able to sustain a case that it is a hobby.

    As a business, you report on Schedules C (maybe C-EZ) and
    SE. You may also find that, if you are accepting donations
    of goods and reselling them, you are subject to state sales
    tax laws, even if you do not hold yourself out to be a
    business.

    --
    Chris Green

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    Christopher Green, May 19, 2004
    #18
  19. "MTW" <> wrote:

    > And, while we're talking about profit or loss, lets not
    > overlook the IRC 162(e) prohibition against deduction of
    > "lobbying expenses"


    I said "hobby" not "lobby". :D

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    chiefthracian, May 19, 2004
    #19
  20. > Okay, I think I'm confusing the issue by using terms "gift"
    > and "hobby" interchangeably. But that's because I'm not
    > going by IRS legalese. Someone donates for my hobby...that's
    > a gift. But for tax form issues, they are two different
    > matters. You are right, using IRS terminology, I'm receiving
    > donations for my HOBBY.

    --snip--
    > I'm still not clear on why gifts can't be called that, even
    > though I'm a hobbyist, not a business. Technically, "gift"
    > is defined as monies or items donated to a business w/o
    > expection of services rendered in return? But if this same
    > donation is given for someone's hobby, it wouldn't be termed
    > a "gift", but a "hobby" income?

    --snip--
    > Ah, I see. So the definition of "gift" only applies for
    > businesses. If money is received for a hobby, it's not
    > termed a gift. In addition to a hobby, I can see just
    > someone giving another a money gift just for the heck of
    > it...and I presume would be taxed ('cause it wasn't given as
    > a hobby.)


    Okay, you are still extremely confused. Let me try and make
    this as simple and clear as possible:

    The definition of a gift ("You make a gift when you give
    property (including money), or the use or income from
    property, without expecting to receive something of equal
    value in return." -irs.gov) applies to all recipients, not
    just businesses. If the donations meet that definition,
    then you have received gifts.

    Step 1: Are the donations gifts?

    IF YES: Then the donations are NONTAXABLE income to you.
    You do not report them on your tax return. You do not
    deduct any expenses. You do not have a business, and you do
    not have hobby income. You take the money and say "thank
    you," just like if your grandma sent you $20 for your
    birthday. End of problem. Do NOT continue to Step 2.

    IF NO: Then the donations are taxable income to you. It
    must be either business income or hobby income (because it
    obviously isn't rental income or some other kind of income).
    Continue to Step 2.

    Step 2: Are the donations business income?

    The basic criterion for whether your activity is a business
    is "Do you have a profit motive?"

    IF YES: Then you report the donations as business income on
    Schedule C, deduct the expenses on Schedule C, and, if you
    have a profit, may have to pay self-employment tax on
    Schedule SE. Profit also carries over to Page 1 of your
    Form 1040.

    IF NO: Then you report the donations as hobby income on Line
    21 of Form 1040, and deduct your expenses on Schedule A,
    Misc. Itemized Deductions (subject to trim equal to 2% of
    your gross income). No self-employment tax applies.

    Okay. Now do you get it? Gifts are nontaxable income.
    Hobby income and business income are two different forms of
    taxable income. If you are receiving gifts, then you do not
    have a business and your hobby is of no concern to the IRS.
    If you are not receiving gifts, then you may have either
    hobby or business income. I am not sure what the IRS would
    say, but in my personal opinion. these are gifts. IF the
    IRS would say they are NOT gifts, then in my opinion you
    have hobby income, because you do not have the profit motive
    required of a business.

    Does that help?

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    Sassy Baskets, May 20, 2004
    #20
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