question for scrapping "hobbyists": how to pay less taxes?

$600 or over is reported as income. But, you can deduct the cost of anything used to generate that income. Even if you use your car, you can deduct a percentage of the car's maintenance or mileage. Don't forget to deduct what you paid for the scrap (Cost of Materials), tools and grinder wheel/Sawzall blades.

Originally Posted by Dumpster Dee

then do you still get a business license ?

Having a business license is not related to taxes (except that you can deduct the cost of the license from your taxes). One is a State function; the other is federal. You can do one and never do the other. And it's no easier nor harder to get caught without either. By filing taxes as a business (even as Sole Proprietor), you can pay LESS taxes by showing a Business Loss which then lowers your taxes on your other income. I've done this by various means; including deducting the cost of the trailer in one year (it was a high income from scrap year) rather than depreciating over five years.

Originally Posted by Mechanic688

As for me, being a disabled vet I don't have to pay taxes so what's mine stays mine!

Oh? I'm a disabled vet, too, at 40%. Been paying taxes since on any earned income (vs disability compensation). I think the only thing you don't pay taxes on is your disability comp from the VA.

Originally Posted by ilyaz

Mick, so let me see if I am reading this right. If I have a regular W-2 from my day time job then I file 1040 without any mention of the scrap income. Then, I also fill out a separate return for a business even if I don't have any business license and report all my scrap income and related expenses there. Right?

Now, here's the tricky part: if I claim more expenses than income and so get a net loss, I get to write the loses off and might actually get a refund instead of paying additional taxes, correct? I heard somewhere that you write off loses like that only for the first couple of years your business is mentioned in your tax forms.

Or am I interpreting this wrong?

Thanks!

That is absolutely correct, legal and common. The IRS expects that there will be a Business Loss for several years in any startup (guidelines USED to be no more than three years out of five, but no longer if you can show certain sincere attempts at showing a profit). Business income and loss is documented on Schedule C and the income or loss is transferred to your 1040 as ordinary income (Loss would reduce taxable income). Having a Business license is not relative. The IRS is only interested in "Did you operate a business during XXXX (year)?" If you consistently show a Business Loss year after year, the IRS MAY question it and make a determination that you operate a hobby, but you will have a chance to show you did attempt to make a profit. Hobbies are still reported as income, but not allowed to show a Loss.

You only file one 1040 for the year - The business income/loss is put on that same 1040 as your w-2 income. There is a specific line for it (in 2010, I think it was Line 40).

If you do show a loss though, they may not allow all of your deductions like home office or some of your 179 deductions(100%depreciation of an asset in one year), you can roll them over into the next year if you show a profit then.

You can't depreciate within a year anyway. Depreciation is only for items that will continue to have value and be used to make money over several fiscal years. IE: a truck, a trailer, etc... If it is used within a year, then it is a consumable, and can be fully deducted.

(Taking accounting for work. Still learning, but willing to help.)

The schedule 179 deduction allows you to take the whole deduction on many items the same year, it's how I have handled all of my tools and business property over the years big and small. Who knows I may not be around next year.
http://www.irs.gov/publications/p946/ch02.html