Death and Taxes. Mostly Taxes, Actually

Hello friends.  In my real life I am an Enrolled Agent.  I represent taxpayers before the IRS in collections and audit issues.  I also assist my clients in tax preparation and corporate structuring and accounting in order to minimize their tax exposure.

By this point, you're saying, "who cares about you?!  Give me Dark Elf strategy!"

First, fuck off.  

Second, I'm going to give you the tools to save thousands of dollars a year so give it a shot, and pay attention.

I want to preface this advice with a few statements.  Foremost, this only applies to people who do painting or modeling for money.  I am a shitty to average painter, but I still make around $500 to $1000 a year in commissions, so I know a lot of you out there are making some serious bank.    And I know equally as much that you aren't reporting the income from it on your taxes.  Mostly because you think that it will cost you more money on your tax bill.  My response is, I have to advise you that not reporting the income is against the law and while unlikely, you could get into very serious trouble for not reporting it.  Also, you are LOSING money by not reporting it, and this essay will explain how later.  So like I said, this only applies to commission painters or modelers.  

The next statement I want to make is that this requires discipline, dedication, and basic accounting skills.  If you are not capable of these things (and based on the waistlines of many hobbyists I know you have zero discipline) you are only going to get yourself into trouble and waste money by trying this.  For those of you who have the ability to do this, read on!

1.  Go to your state's Secretary of State Website and go to the corporate registration.  It is important that your new painting business is a corporation rather than a sole proprietorship.  A sole proprietorship that doesn't turn a profit for a few years in a row is considered a hobby, and expenses are not deductible.  A corporation does not have this major limitation.  Creating a new corporation is very easy.  You pay around $150 and fill out the Articles of Incorporation, wait 6 weeks to get your corporate charter and you're in business!

2.  After you get your corporate charter, you go to the IRS website and apply for an Employer Identification Number.  You aren't going to have any employees, but this will give you the identification number you need to open a corporate bank account and file a corporate tax return.  The second thing you have to do is file IRS Form 2553, Entity Classification.  This is where you will tell the IRS that your corporation is an S-Corp.  Trying not to be technical, this is generally tax beneficial to small corporations and makes your returns at the end of the year immensely less complicated.

3.  With your corporate character and EIN in hand, go to your bank of choice and open a free business checking account.  It is absolutely imperative that from this point forward, all your purchases relating to the hobby are conducted through this account.  You must either write a check or use the debit card to pay for everything in order to ensure proper accounting.  Additionally, any income you earn from painting or modeling must be deposited into this account.

4.  Expenses.  This is the bread and butter.  Make business cards first thing.  Are you attending a Golden Daemon contest?  Your airfare, hotel, 1/2 of meals, entry fee, etc. are all deductible expenses.  Attending a painting contest is advertising, and a legitimate business expense.  Thus, the costs are legitimately deductible.  Your nicely painted personal army at any tournament is an advertisement for your business (so long as you bring business cards), so the costs to attend NOVAopen or BOLScon are deductible.  So is the cost of the miniatures, and the paint and the green stuff.  Did you have to buy a new brush set and a full line of GW paints, and a full modeling tool set?  Deductible.  So you can see the expenses are going to add up.  They will almost certainly add up faster than your income.  If you have to deposit personal money into the corporate account to pay your expenses that is OK, in fact, that is what you want.  Without getting too technical, when you give personal money to a corporate capital account, you are increasing your basis in the corporation, which is a good thing to have when the corporation is going to lose money, as I will explain below.

5.  Filing your returns at the end of the year.  Here is a hint that H and R Block don't want you to know: filing tax returns is easy.  For most people, you can prepare your returns in way under and hour.  Your corporation will file an 1120S Federal Corporate Tax Return and a State Corporate Income Tax Return.  All the income from the business (and there has to be some income or else this whole exercise is fraudulent and you are committing tax evasion and you will go to Federal Pound Me In the Ass Prison) is declare.  This will be easy to determine.  Get your corporate bank statements for the whole year, and any deposit that is money coming from a paying client or transferred from your Paypal Account should be totaled up and put down for gross income.  Your expenses should be easy to track as well.  Any money being spent out of the corporate account is an expense and should be placed into the proper category.  If you bought a $3 can of primer at Walmart, that will go under "supplies."  If you bought a $90 GW battleforce, that will go under "materials."  It helps to use Quickbooks every month to keep track of what category is what, but if you can't commit to that you can at least keep an excel spreadsheet breaking everything down.

6.  Your corporation showed a loss.  Surprise, surprise.  The corporation will issue you a K-1 statement and send a copy of the K-1 to the Internal Revenue Service and state taxing authority, which is sorta like a W-2 but for S-corp owners or partnership members.  This will show that you lost a certain amount of money.  When you file out your IRS form 1040, individual tax return you will file out Schedule E, and report the loss on Line 17.  This loss will lower your adjusted gross income.  Which will lower your tax rate.  Which will lower your tax bill.  Which will get you a bigger refund.  

So what did we accomplish?  Basically, your hobby became a legitimate business that lost money, and the money you lost on this business is money you don't have to pay taxes on.  So let's say you spent $3,000, on GW related minis, paints, tournament attendance/travel, modeling tools etc, and made $500 off commissions.  We will also assume you're in the 25% tax bracket.  You just got a $625 larger tax refund.  So that works out to a 21% discount on your GW related purchases for the year.  Not bad.  This will take a half-dozen hours of your time per year in accounting and preparing your returns.  It will also cost you around $100 to re-register your corporation every year with the state.  Whether all this is worth your time depends on how much you spend on GW stuff, and how much you spend on attending tournaments you have to travel to.  Some people may say that to save $500 or so isn't worth the effort, and that's totally understandable.  But if it is worth your effort, by all means go for it. 

If anyone has any questions, please feel free to ask and I'll be happy to answer them.