“Q” is for Quilting. I tried to find a tax term that didn’t start with the word Qualified or Qualifying and there just aren’t any so what the hell – let’s make this post about Quilting. I can’t imagine I’m going out on a limb by saying that quilting is just a hobby for most people. So what happens when you sell your quilt to a friend? What happens when you start selling them at art shows? At what point does a hobby turn into a business? That can be a tough question to answer. Essentially it comes down to when does Quilting the Hobby become Qualified Quilting the Business? For those keeping score at home, yes, I just invented the phrase “Qualified Quilting”.
Qualified quilting is going to involve filing the income and expenses as part of your tax return on a Schedule C. In order to be a qualified quilting business you need to have a business plan, some profit motive and then keep good records of your income and expenses throughout the year. Making quilts with $100 of materials and selling them to friends / relatives for $100 does not have a profit motive because a profit is not even possible. If you are going to be running a quilting business you should consider setting up an LLC, getting a tax ID number, keeping a separate bank account for the business, etc.
So what if quilting is just a hobby? What do you have to report then? Hobby income is still income for your tax return, but it is not subject to self-employment taxes because you aren’t employed in a business. Hobby expenses are allowed only to the extent you have hobby income. That means your quilting hobby with $200 of income can’t claim $3,500 in quilting expenses. $200 of hobby expense would be allowed as a deduction on Schedule A, but that is subject to the 2% floor limitation and is not allowed against AMT. From a record-keeping standpoint you would be better off just giving the quilts away so you don’t have to worry about any hobby income or hobby expense rules. Either way, happy quilting.
Taxes A to Z – still randomly meandering through tax topics, but at least for 26 posts in an alphabetical order.
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