How much money can you make before taxes become an issue?

[rarefish383]

Hypothetically speaking of course, because the IRS is listening. When I was 16 and my Dad was still in the Tree Business, I kept all of the Oak that came into the yard. In my spare time I would split and stack it. Then in the fall I would sell firewood. My Dad let me use the company trucks to deliver and didn't make me pay for fuel. In a good year I might sell 30 cord. Hypothetically I continued to do this for several years. Now I'm 61 and retired. One of my favorite pass times is sitting on my 3 inch thick, live edge Oak bench around my fire pit, drinking an IPA from a Growler from my favorite pub, with friends. One of my friends looks up and says holy cow, how much firewood do you have stacked up there. I say about 20 cord. He says how much wood do you burn. I say about 5 cord a year. He asks if I'd take 200 bucks for a cord. I say, nope, IRS has my woodpile bugged and might bust me.

Hey, I like to tell stories and joke around. Here's a true story. When Dad was still in the tree business we worked for a fellow named H. Gabriel Murphy. He was quite wealthy and was one of the owners of the Washington Senators. I asked him a question about accruing wealth. He asked me the question, "When I have a question about trees who do I ask?" I said "My Dad". Then he said, "Why do you ask me a money question?" I laughed and said, "Because you have a lot of it!"  He said, "That's because I have good financial advisers, get one."  So, I'm a kid making maybe 8-10 thousand a year and he tells me to get a financial adviser, some of the best advice I've ever received. The first thing my adviser told me was, "It's not how much money you make, it's how much you save."  Now, I don't own a base ball team, but I don't work either. I hunt, fish, and play with my mill.  Don't ask money questions of folks on a forum. Get a financial adviser, they're kind of like priests and confessions, and remember, it's not how much you make, it's how much you save. 

Hypothetically, don't tell the IRS about that pile of firewood, because I do plan on selling it, and a few live edge slabs, Joe.

[Shopcat]

Okay, in a previous existence I was closely associated with a state taxing authority.  Hopefully everyone doing this reads this. 

Despite some very misinformed opinions the states are getting massively better at detecting tax evasion.  In a majority of states they are now using a very, very good software package called AllTax by Fast Enterprises.  Old local built tax applications are ancient history, and with them their major inadequacies.   In the 2000 we exchanged data with the IRS once a quarter, via magnetic tape.  By 2008 the tape had morphed into a nightly file transfer.  Depending on which options you chose with AllTax the data exchange is now instantaneous and constant.  So the states see what the Feds see, and depending on state regulations it goes both ways.  And the Feds have all the resources they want to go looking.

States have entire teams of employees that spend all day looking for non-filers, including using Google to do it.  I know they look for construction companies and compare their web statements with their annual returns.  Same with home lodging like B&Bs, and I imagine now with AirB&B.  When I left gov employment and went to furniture school I lived in a loft above the main residence.  I booked it via the web.  The owner told me a story of how the state showed up one day and asked him how the website showed No Vacancy, but his return showed no rental income.  A settlement with penalties followed.   I assume if a Deputy AG showed up at the door of AirB&B with a subpoena for transaction records your privacy would be the last thing AirB&B would be concerned with.   I don't know for sure, but I think the principle probably applies to Paypal, et al.

Low level stuff, especially cash, probably misses detection, for now.  But if you are making a living at this, they will find you.  Figure they routinely ask waiters why their tip income seems inconsistent with their hours and the restaurant's turnover.  They do it all day, every day, and they work systematically at improving.   And every year they all get together at a big conference and share what they're doing.

 

[wtnhighlander]

That's why I build stuff and give it away. Tax THAT, Mr. IRS!

[Coop]

Ross, watch what you say on here. I understand that there is a lifetime exemption of $11.4 million before tax kicks in. May want to keep tabs on how much you gift! 

[wtnhighlander]

I'm sure my stuff will be appraised at "flea" market value. Might take a while to hit that exemption....

[difalkner]

Disclaimer: I am not a CPA or tax specialist

Three years ago when I began my at home woodworking after years and years of working for the man my CPA told me to make a decision - hobby or business.  He said "if you tell me it's a hobby I can't help you with expenses but you'll still need to report income.  If we're calling it a business then expense everything you deem applicable.  The caveat is that you'll have three years in which to turn a profit or at least break even."  After that the IRS will not allow us to call it a business and I stand the chance of being audited and forced to redo the previous tax returns reflecting zero expenses, showing this as a hobby, and paying the taxes owed plus penalties and interest.

The first year was very easy - I started mid-year and built the CNC so no profit.  The second year I secured local contracts and clientele and opened our Etsy shop late in the year, almost broke even.  This third year has been a banner year and we'll definitely show profit.

I don't think you can show expenses for hobby woodworking at home any more than someone who fishes or hunts can write off their boats, guns, lures, ammo, travel, etc., even if you sell the fish you catch or the meat from your hunt.  It's a hobby and that's where you choose to spend your money but that's all it is - a hobby.

David

[Bankstick]

I built custom  fishing rods for seven years. I went to a CPA and got the low-down on a home based business; even printed off the pages for my files. All income is to be reported, state and local taxes collected and submitted to the proper office. I also had to charge an excise tax that was turned into the Treasury Department as part of the Wallop-Breaux Act; look it up. Check with a CPA for your questions as it is well worth it. You can deduct the CPA's fee, too. Visit your local tax office and call the state revenue office for more specific information.

3 hours ago, difalkner said:

if you sell the fish you catch or the meat from your hunt

Fish requires a commercial license and it is illegal in Tennessee to sell game.

[Shopcat]

Believe it or not, both the IRS and state revenue love you Dave.  At the state we very much wanted to see guys like you survive and thrive.  America Can spell Entrepreneur.  I did some contracting in IT after retirement, and did the whole business registration thing.  At the time (decades ago)The Feds routinely did a no cost half day class on the whole process, and how to stay out of trouble. 

The earliest political struggles in the US were over taxes (the Whiskey Rebellion).  But the attitude in the government is to not let the slackers have a cost advantage over the compliant.  Government is Not Supposed to Be More Efficient, It is Required to be Equitable.  The concept is EQUAL PROTECTION BEFORE THE LAW.

Our enforcement guys were badged and packing, POST certified law enforcers.  They had to be, some people just are not going to pay, and when they get caught sometimes have a violent reaction.   States, by the way, kick the Feds' ass.  They always showed up at property seizures to find our padlocks on the door and us already there and gone, they never sorted out our business day started 3 hours before theirs.  

Most of the established business failures are related to external events.  The firm is doing okay until something non-business happens, usually someone gets sick.  Then payroll taxes, etc. get used for expenses.  It was never our goal to finish it off.  We had specialists in working things out.  A failed business is not a desired outcome, but by the time the settlement conference happens things are usually pretty well gone.

Personally, having been down that road, I think the posters here have it inverted.  They need to put the business organization before the wood working.  Instead of how do I sell my ____  or get money to pay for toys they should be reading books and going to seminars on constructing a business plan.  Fill in those boxes, and the rest happens.  Locally our public library district runs monthly classes on business startup.  Lots of resources out there. 

The best rule I ever heard on business in general: 

All you need to be in business is a customer.  Everything else can be purchased.  If you don't have a customer, all you have is a hobby.

I did my consulting phase via pull.  It was a pre-exisiting relationship. They wanted my service, I knew what they needed, they came to me.  When the project ended my business ended.  I might have gone prospecting for another customer, but there are just too many fun things in the world.  I have seen a goodly number of small healthy consulting practices with just one client.  Yes, diversification can be good, but what does it cost?

 

[Bankstick]

Just don't pay taxes and then got one of the law firms that advertise on TV to get you off with a fraction of what you owe. I'm told that professional athletes are told this to keep most of their money.

[JohnG]

1 hour ago, Bankstick said:

Just don't pay taxes and then got one of the law firms that advertise on TV to get you off with a fraction of what you owe. I'm told that professional athletes are told this to keep most of their money.

That is terrible advice. 

[drzaius]

3 hours ago, Bankstick said:

Just don't pay taxes and then got one of the law firms that advertise on TV to get you off with a fraction of what you owe. I'm told that professional athletes are told this to keep most of their money.

Oh ya, I'm sure those ads are completely truthful. 

I don't understand the rest of your post at all. Are you being sarcastic?

[Coop]

@Shopcat. Good advice and thanks for taking the time to explain and type it out for us. 

[Bankstick]

On 12/10/2019 at 9:49 PM, drzaius said:

Oh ya, I'm sure those ads are completely truthful. 

I don't understand the rest of your post at all. Are you being sarcastic?

Not sarcastic, truthful. Professional athletes, this is what some are told. Makes sense. Ever see the ads- "I owed the IRS $240,000 but XXX worked with the IRS and I paid $20,000." Why pay the full amount when you can get by with a fraction owed?

But they don't tell their fees. Wonder how much the government would get if they collected all taxes owed.

[JohnG]

It doesn’t make sense and those ads are either lies or the rare cases where there is a real case to settle for less.  If you have assets and/or income and are not drowning in debt with no hope to ever pay it off, the IRS will NOT take less than you owe. They are not stupid. Hire a good CPA to ensure you don’t pay more than you truly owe and pay your share. 

https://www.consumer.ftc.gov/articles/0137-tax-relief-companies

https://www.investopedia.com/articles/tax/11/tax-settlement-firms.asp

If you want to try it, go for it and let us know how much money you lose. 

[drzaius]

2 hours ago, Bankstick said:

Not sarcastic, truthful. Professional athletes, this is what some are told. Makes sense. Ever see the ads- "I owed the IRS $240,000 but XXX worked with the IRS and I paid $20,000." Why pay the full amount when you can get by with a fraction owed?

But they don't tell their fees. Wonder how much the government would get if they collected all taxes owed.

I do not believe a word of it. Those ads are right down there with the Nigerian 419 letters.

[Bankstick]

Call the 800 number and see. I don't worry about it as I pay all my taxes and use a CPA for my business.

CPA- Can't Pass Again.

CPA- Cheapest Person Around

CPA- Certified Parkinglot Attendant

[JohnG]

9 minutes ago, Bankstick said:

Call the 800 number and see.

 

Let’s get this thread back on track.

[Tom King]

I always wondered how so many pro athletes, after making tens of millions of dollars, are broke a few years after they quit playing.

[Coop]

53 minutes ago, Tom King said:

I always wondered how so many pro athletes, after making tens of millions of dollars, are broke a few years after they quit playing.

Life in the fast lane and not budgeted for it! 

[drzaius]

14 hours ago, Tom King said:

I always wondered how so many pro athletes, after making tens of millions of dollars, are broke a few years after they quit playing.

It's cause they called that 800 number 

[Shopcat]

Willie Nelson lost his house.  I believe he had a pretty good lawyer.  The Feds don't even like the Feds.  No one I ever talked to at the IRS liked the IRS or their job.  Most of the ones I knew were geologists and mineral landsmen refugees from the oil industry collapse in the mid-1980s (which tells you I am Olde).  Probably they refreshed that with software engineers after 2000.  I heard at one point there were +52,000 unemployed software types locally in 2001.  You can burn thru a lot of auditors and always find recruits. Feds have good health benefits by the way, family coverage is decently priced.

[Bankstick]

On 12/12/2019 at 7:16 PM, Tom King said:

I always wondered how so many pro athletes, after making tens of millions of dollars, are broke a few years after they quit playing.

From a reliable source who had a close friend in mid-management for a pro team- drugs, booze, women. They lived from one weekly paycheck to another. Broke before the next paycheck!

My grandson plays minor league baseball. Now the teams have a certain amount invested. We read about the $XXX million contracts. They don't get that over the contract time of  a few years but take it like an annuity over a number of years. Let's see- $200,000,000 divided by 40= WOW!