DiyLightAnimation

Fun => The Porch => Topic started by: RJ on September 04, 2010,

Title: Important information for all members to read
Post by: RJ on September 04, 2010,
I am posting this since it will have impact on our site in a number of ways in the year to come.

New rules on paypal will cause them to report you if you transactions exceed 200 and your total transactions hit $20,000 starting next year.

Many of the single coops have exceeded these limits in the past!

Here is the rub, If I continue doing coops even as a hobby and even if I continue to keep the cost to where I am not turning profit, I will be forced to file documents with the IRS, keep detailed records of everything I purchase for the coops and file forms each year to prove to them that I am doing this as a hobby and do not owe them money. Otherwise they may claim I owe taxes on the total amount of the coop value which is sometimes HUGH!

This impacts the others doing coops for the group also. It is a real issue and I am at this moment not sure how I am going to resolve it for myself.  As this is a hobby for my enjoyment it becomes hard to justify all of it.

I opened this thread to discuss this issue but I do point out that I am an honest citizen and work for Law Enforcement, that said I will not be interested or allow the thread to turn into how we can do anything but honest methods. Any post made on other ways will be removed.

When you consider the work involved in doing coops for basically free it may get very hard to get people to do coops in the coming year.

I'm very interested in others thoughts on it.

RJ
Title: Re: Important information for all members to read
Post by: ponddude on September 04, 2010,
RJ,

I was wondering how you were going to deal with this.  I was contacted by Paypal earlier this year regarding it as well.  When it all comes down to the bottom line, Paypal is only doing what the government has told them.   This has to do with new tax laws that were passed during the Bush administration and are taking effect in 2011.  It really impacts how our hobby is going to continues.

I am in the exact same boat as you are in and if I continue to do this as a hobby I really can not justify it at the end of the year.  I have looked into other payment methods such as Google Checkout which made a brief appearance on my site, but didn't like how it integrated.  I even looked into becoming a certified 501(c)(3) organization but than it becomes illegal to even make the 3% fees that are most usually charged.  All and all, it doesn't look good for us to continue to go as we currently do.

I know a lot of people will bark about this, but becoming a legitimate company may only be the only method that avoids keeping a tremendous amount of documentation for the government.  In most cases in becoming an LLC you only have to charge sales tax in the state you conduct business in.  (In my case NJ, in your case FL)  Looking into the business world can be daunting but I moved into it after college and even have a degree in it.  Although I haven't used it in my "real" job (haven't we all) it may become very important in the future.
Title: Re: Important information for all members to read
Post by: Greg on September 04, 2010,
It may be true that you might need to collect sales tax on sales in the state you're doing business in, but the burden of record keeping and satisfying the feds that indeed you did not make any money on the sales that take place is not lightened in any way in my experience.

Then there is the potential issue of gross receipts tax in some states werein they (the state taxing authority) doesn't care about profitability and levies a tax on the business entity based on the gross cash flow of the business...

Tough issue for sure.

Greg
Title: Re: Important information for all members to read
Post by: Jeffl on September 04, 2010,
Is there a link that explains the laws and rules in more detail?
Title: Re: Important information for all members to read
Post by: mmais68569 on September 04, 2010,
We could always go back to the old way before PayPal, checks, money orders & cash. It would mean more bookkeeping but would avoid the tax reporting.
                 Mike
Title: Re: Important information for all members to read
Post by: rrowan on September 04, 2010,
Just another random half thought from yours truly.

This would also seem to hurt the bottom line of the suppliers we use for the co-ops. Like mouser and the pcb manufacture that RJ uses. Seem like they would want to help us with this problem. I am pretty sure either Bill and/or RJ could directly talk to the sales rep of each company for help.

Cheers

Rick R.
Title: Re: Important information for all members to read
Post by: RJ on September 04, 2010,
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Just another random half thought from yours truly.

This would also seem to hurt the bottom line of the suppliers we use for the co-ops. Like mouser and the pcb manufacture that RJ uses. Seem like they would want to help us with this problem. I am pretty sure either Bill and/or RJ could directly talk to the sales rep of each company for help.

Cheers

Rick R.

What do you think they could do for us Rick I curious what the idea would be?

RJ
Title: Re: Important information for all members to read
Post by: Kwajtony on September 05, 2010,
I have looked, albeit briefly, at the IRS website on the Taxation of Hobbies.  Perhaps, PAYPAL would be so kind as to add a category that declares this transaction is "HOBBY" related and we can register as "HOBBY" users.  The only "requirement" then would be to document how much we spent on pieces / parts in support of our hobby vs what paypal collected Viola.  This would clearly mark it as a hobby not intentioned for the "creation of profit" nor have "profitable" years more than two of five or something like that.  I will ask my CPA the next time I talk to her about this and her interpertation (did I really write "my CPA," it's not like that ---  the CPA handling my parents probate -- that's better).

The ability of us Little People to get together and combine purchases to take advantage of volume discounts should not cause us a tax problem (IMHO).

Tony "C"
Title: Re: Important information for all members to read
Post by: WWNF911 on September 06, 2010,
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The ability of us Little People to get together and combine purchases to take advantage of volume discounts should not cause us a tax problem (IMHO).

I don't think you'll find anyone here that doesn't agree with that.  ;)

Leon
Title: Re: Important information for all members to read
Post by: JJJR on September 06, 2010,
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I have looked, albeit briefly, at the IRS website on the Taxation of Hobbies.  Perhaps, PAYPAL would be so kind as to add a category that declares this transaction is "HOBBY" related and we can register as "HOBBY" users. 

The only problem I could see and Paypal would not be opt to go this route is anyone could claim "hobby" to avoid reporting.
And sadly with the crooks out thier looking for ways to bypass tax paying and reporting I could see this being used by shady individuals as a method to get around tax reporting themselves. Which sucks as the good people that we are could be ruined by such individuals. Its for this reason I don't see Paypal granting such an option.   :(

Cash or checks might be the only option again unless anyone else has a different idea? ???
Title: Re: Important information for all members to read
Post by: n1ist on September 06, 2010,
Won't checks have the same issue?  I'd guess banks would  have similar reporting rules.
/mike
Title: Re: Important information for all members to read
Post by: Dennis Cherry on September 06, 2010,
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Won't checks have the same issue?  I'd guess banks would  have similar reporting rules.
/mike


You are right, the banks have the $10,000 rule that if you make a deposit of $10,000 or more it is reported to the IRS. Deposit $9,999 or less and it is not reported.

I think this is still being used by the banks and IRS.
Title: Re: Important information for all members to read
Post by: tbone321 on September 06, 2010,
The difference is that the banks ONLY report single deposits of $10,000 or more.  They have no concern about the number of small deposits or a total of small deposits.  What I would look into is what exactly paypal is basing this reporting on.  Is is all uses or is it only the payment type that we are using.  Remember, we are using the payment for goods and services option which even by its name indicates that it is intended for a for profit business use.  If one of the other options does not require them to report to the IRS, perhaps we need to make adjustments to use one of those other options.  I know that one of them doesn't send the address but if that's all it is then as long as the notes area is still sent to identify who sent the payment and what it is for then the missing address is easy to get around.  I do have another possible work around but it is a bit long to type out but it may make it a bit easier on the coop managers.
Title: Re: Important information for all members to read
Post by: Freebird on September 06, 2010,
Okay  Im just thinking out loud here...  What about limiting coop managers to 9999.99 a year?  It would mean more coop managers would have to step up to the plate.  And then what about more coops and limiting the amount in a coop.  Just a thought.

Freebird
Title: Re: Important information for all members to read
Post by: tbone321 on September 06, 2010,
The problem with doing that is that it would limit the value of doing coops at all.  One of the primary benefits of the coop is that the large volume related to a significant savings on the cost of parts.  If you limit the size of the coops down to low then those cost savings disappear and it just becomes a lot of work for the coop manager for nothing.
Title: Re: Important information for all members to read
Post by: sittinguphigh on September 06, 2010,
Why not go direct to the company's.  Have them use there own Paypal account. We can still run the process but use the companies paypal. 
Title: Re: Important information for all members to read
Post by: RJ on September 06, 2010,
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Why not go direct to the company's.  Have them use there own Paypal account. We can still run the process but use the companies paypal. 

Keep the ideas coming. I did talk with the suppliers a year or so ago about kitting the parts for us as a large purchase done individual to give us some of the break on multiple orders done under a single umbrella. They were not very interested at all. This would be where each of you order your own coop kit as a special part# and get a discount based on we are buying as a whole in larger amount.

RJ
Title: Re: Important information for all members to read
Post by: Kwajtony on September 06, 2010,
Until I can talk with the CPA, I think RJ is onto something with vendors kitting projects for us.  Perhaps a new business model which allows vendors to bid on the sale of say 100 kits (the coop manager would contact the vendor with the # and parts list of a sure sale).  This new law has to hurt them too.   Mayhaps our congress people can do something good for us.
Title: Re: Important information for all members to read
Post by: Greg on September 06, 2010,
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The problem with doing that is that it would limit the value of doing coops at all.  One of the primary benefits of the coop is that the large volume related to a significant savings on the cost of parts.  If you limit the size of the coops down to low then those cost savings disappear and it just becomes a lot of work for the coop manager for nothing.

Well you could spread the payments amongst multiple co-op managers under a single co-op but for purposes of parts purchase (and perhaps the sort and ship) aggregate that under a single manager but then the managers would need to arrange funds consolidation between them prior to parts ordering. Would slow the overall process a bit and of course the managers would need to trust in each other a bit more.

Greg
Title: Re: Important information for all members to read
Post by: RJ on September 06, 2010,
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Until I can talk with the CPA, I think RJ is onto something with vendors kitting projects for us.  Perhaps a new business model which allows vendors to bid on the sale of say 100 kits (the coop manager would contact the vendor with the # and parts list of a sure sale).  This new law has to hurt them too.   Mayhaps our congress people can do something good for us.

Maybe I did not say it clear but the suppliers do not want to do this.

RJ
Title: Re: Important information for all members to read
Post by: lineman on September 06, 2010,
Just my thought can we have 2 coop managers each collect half and then each pay but ship the parts to one manager . I don't know if this is possible just a thought
Title: Re: Important information for all members to read
Post by: IndianaChristmas on September 06, 2010,
I like the idea of delivering money to several co-op submanagers which can then send the collected money off to the primary manager.  This would create some extra steps and then folks would have to be told which accounts to send the money too but this seems like a way around the issue. 
Title: Re: Important information for all members to read
Post by: RJ on September 06, 2010,
I do not think this helps it would actually add paypal fees and cause more people to keep paperwork. You still have one paypal account getting it all at the end.
 

RJ
Title: Re: Important information for all members to read
Post by: tbone321 on September 06, 2010,
Not if the sub managers send the payment to the manager by check. 
Title: Re: Important information for all members to read
Post by: Greg on September 06, 2010,
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Not if the sub managers send the payment to the manager by check. 

That is what I was implying in my prior comment...  Cutting out paypal for the consolidation of funds prior to parts order.  Could do a wire transfer to the master co-op manager which would derail the bank's putting holds on checks and the wire transfer fees would be less than the 3% I'd imagine.  But yeah there is always the issue of record keeping to deal with.

Greg
Title: Re: Important information for all members to read
Post by: Rainlover on September 06, 2010,
What about Electronic Funds Transfer? I don't know what the costs are or how hard it is to set up. Our company does EFT with a lot of our customers and vendors. I will ask our office manger tomorrow. It may be worth looking into.

John
Title: Re: Important information for all members to read
Post by: WWNF911 on September 06, 2010,
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I have looked, albeit briefly, at the IRS website on the Taxation of Hobbies.  Perhaps, PAYPAL would be so kind as to add a category that declares this transaction is "HOBBY" related and we can register as "HOBBY" users.

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The only problem I could see and Paypal would not be opt to go this route is anyone could claim "hobby" to avoid reporting.
And sadly with the crooks out thier looking for ways to bypass tax paying and reporting I could see this being used by shady individuals as a method to get around tax reporting themselves. Which sucks as the good people that we are could be ruined by such individuals. Its for this reason I don't see Paypal granting such an option.   :(

Cash or checks might be the only option again unless anyone else has a different idea? ???

Actually best idea I've heard of yet.

JJJR,

Although you make a good point, I wouldn't want to live in a country where unless we can think of every possibility to thwart the criminals then we can't have quality of life. I would'nt be so willing to be defeated.  Thats why we have law enforcement and thats why we have an IRS and a reporting and an auditing process. Remember all of the safeguards in the world will only keep the honest people at bay when they are tempted. I know it sucks but just being honest,... The dis-honest people when tempted will find a way around any safeguard if they want it bad enough. It's just the way it is.

Leon
Title: Re: Important information for all members to read
Post by: JJJR on September 07, 2010,
Leon, I agree this would be the simpilist solution to this issue. My concern is Paypal would be very reluctant to do this for several reasons.
The first being a way to circumvent IRS reporting but even more so this would be another aspect of paypal that the organization would have to monitor and control. Requiring more man hours and resourcces to keep track of the transactions and justifying that each one was a hobby purchase and not a bussiness transaction.

I guess the real question is...how many hobbiest are doing co-op funded purchases and is the hobby sector big enough to warrant paypal the need to open such an option? My only concern is while we are a large group in the DIY Christmas sector in the overall Paypal transaction group I don't see us being a big enough entity that Paypal would want to warrant the extra effort to cater to.
Thats my concern.

I think it wouldn't hurt to contact paypal about the hobbiest option but we should come up with some alternatives to paypal at this point unless something changes I just don't see them offering us this option. I know EFT transfers carry a fee much like paypal but if you go to the Western Union website those fees vary depending on where its going and by how much money is being sent unlike paypal's flat %3 fee in most cases. In this case most members I feel would rather mail the cash or check to the co-op manager as the reason paypal was widely used was it was convient and easy. As long as you had a computer you didn't have to leave home. With EFT transfers you have to stand in line provide two forms of id and its easier just to mail a check at this point.
Title: Re: Important information for all members to read
Post by: rrowan on September 07, 2010,
Hi Folks,

Here is another way to look at it. I know the following link is for photographers but they are in the same boat if not worse. They have set up a email template to send to the IRS to ask then to change the rule. There is a time limit of Aug 29th. I would think a modification of their template geared to the hobbyists would help. Since I know we have a word smith or more on DLA hoping they can do the mod to the template for us to send in.

http://www.asmp.org/strictlybusiness/category/posts-by-topic/industry-announcements/

Thanks

Rick R.
Title: Re: Important information for all members to read
Post by: jnealand on September 07, 2010,
There is also a lot of movement in Congress to change this requirement so feel free to inundate your congresspersons  and let them know how burdensome this could be.
Title: Re: Important information for all members to read
Post by: castortiu on September 07, 2010,
I read something that on Sep 14th there will be a voting to see if this is repelled.

http://thehill.com/blogs/healthwatch/health-reform-implementation/113505-johanns-slams-dems-alternative-to-his-1099-repeal-bill

I may be reading something else :)

Cas.
Title: Re: Important information for all members to read
Post by: JJJR on September 08, 2010,
Cas, That actually looks pretty relavant. I read a little furthur in and found a link to this article about the provisions they want to change.
http://thehill.com/blogs/healthwatch/health-reform-implementation/113029-baucus-urges-repeal-of-small-business-1099-filing-mandate-paid-by-bp-tax-hike

It looks like they would remove the 1099 filling requriment or at least bump the limit thats required up. They would justify the tax cost by also repelling a tax break for oil industries thats in the current law.
Title: Re: Important information for all members to read
Post by: castortiu on September 08, 2010,
If the bill is repelled RJ won't have to do paperwork for a while until he has more than 25 employees, how far are you in that count RJ?  <pop..

Cas.
Title: Re: Important information for all members to read
Post by: loveroflife96 on December 10, 2010,
Understanding that everyone wants to keep the cost of each individual product low, what would be the feasibility of having multiple Co-op managers collecting money and paying the vendor in separate payments for specific parts with shipment occurring to one individual.  (i.e.  John, Mary, Joe, and Sue take payments for the items.  John takes payment for PCBs; Mary takes payments for enclosures, Joe takes payments for 1/2 the parts, Sue takes payments for the other 1/2.  All the items are shipped to John for separation, packing, and shipment).  Using paypal it would only increase costs by $1.20 for four people to manage.  Only issue I would see is communication between those four individuals to ensure that each member has paid the designated amount to each of them.   Being a noob to this, I have no clue the total expense of the coops in the past, but above, using 4 people, it'd make an $80,000 buy possible.  Of course, if multiple coops were planned, then the responsibility would have to be spread among more people in the community.  Of course, this would only be fair too, it shouldn't always be the same people staying up late nights to make the coops happen, we should all share in the responsibility if we want to be a DIY community.   

Title: Re: Important information for all members to read
Post by: hbomb341 on December 12, 2010,
RJ,

Was ponder what the follow up on this was with the new CoOp opening up?  Are you just going to have to convert another room in your house to a keep the records of all of these?

FYI - Anyone looking for the PayPal "word" here it is - https://cms.paypal.com/us/cgi-bin/marketingweb?cmd=_render-content&content_ID=marketing_us%2FIRS6050W

Harrison
Title: Re: Important information for all members to read
Post by: Watsont79 on December 26, 2010,
With the new reporting requirements, I don't see how you can avoid the IRS filing requirements.  The best you could do would be to simplify the recordkeeping.  I would think paypal could help with that especially if you can make the COOP purchases directly from the paypal account.   
Title: Re: Important information for all members to read
Post by: tng5737 on December 26, 2010,
Just curious as where all of this puts our current LE coop?
Title: Re: Important information for all members to read
Post by: cubbieco on December 30, 2010,
I know this post is a little late to the table but I found this posting from another on the board.  I know you can't believe anything you read on the internet but while I am not officially a "CPA" per say I am an accountant of 13+ years and have prepared taxes for people many of those years.  I'm not going to tell anybody how to bend rules but will spell out officially how things look from the IRS.

Any money you get from anywhere is income.  Period.  End of story.  There is no magic "hobby" income because hobby income is still income.  The differences with "hobby" income is that it is more difficult to deduct the losses if you have any.  Otherwise hobby income is income like anything else.

Spreading out money through several people is a bad idea.  Put it this way.  If $5,000 went through one individual and that individual happened to get a random audit for whatever reason the IRS will see that $5,000 come through their bank account (paypal account, whatever) and ask why they didn't report it as income.  Yes in the end the money back out may be deductible but it could cause a large headache in advance of that.  The same thing can happen for any coop manager.  Yes personal audits are more and more rare but with computers being more powerful and many of these "big brother" laws coming in to place it will be harder to not report income to the IRS.

Now - that's the bad news.  The good news is that this isn't very difficult to deal with.  I've never been a coop manager so insert any corrections you have.  In general you are ordering parts from lets say 5 different suppliers.  So you collect your $10,000 and spend $9,000 on parts from these 5 suppliers.  So - you need to save those 5 invoices.  Stuff them in a shoe box / whatever you need to do.  Save the email receipts / whatever you get.  It is not that hard to keep those invoices.

Now you mail out 600 individual packages for $1,000 (yes I know my math is wrong so bear with me).  The easiest thing is to pay with a credit card / debit card so you have a good record of how much you spent on postage.  Save the address list and a handful of the package receipts.  Saving 600 receipts might be overkill but if you are organized enough go ahead and do that.  Otherwise saving a handful of them should be sufficient.

So you have a record of everything you spend.  Create a schedule C on your tax return (business / hobby income ) report the $10,000 in income at the top.  Then the $9,000 will be "cost of goods sold" and the remaining $1,000 will be "postage" expense.  If you get audited you have the invoices for the parts, you have an electronic copy of all of the post office purchases (through your credit card statement) and a few of those receipts.  Then you can explain what you are doing and everything is fine. 

You don't need a federal ID number or to register a business name if you don't want to.  Although if you do this enough and you have neighbors that work for the city they may point out you should have a city / state business license (which technically you should) but for the occasional coop person in their spare time not making any money you should be ok.

The important things to know here:  Don't use cash for anything in a coop.  Always a check or a credit / debit card.  You need that electronic record of the transaction to help justify not being taxed.

Don't hide anything.  One way or another they'll find out about the money.  Personally I think it would me more likely you would be audited for this if the IRS catches wind of the income somehow then if you report the income and expenses up front.  Computers are powerful things and the laws are working for the IRS in finding out about things like this.  Another thing to know:  Businesses are not required to make a profit.  You can break even and report it and be fine.

If you have any money left over don't try to do anything stupid like deduct your own time as wages or something.  If you have money left over it is income to you and needs to be reported as such.

Feel free to PM me with questions or I'll try to keep an eye on the board.

David in Utah.
Title: Re: Important information for all members to read
Post by: RJ on December 30, 2010,
You are correct and since we work to not make profit this is how I am approaching it on my experts advice.

RJ
Title: Re: Important information for all members to read
Post by: jess_her on January 04, 2011,
OK the newbie has something, How about asking Mouser or Digikey or newark kit them We buy direct, maybe more money but we might be able to cut a deal. Or how about finding a electronic hobby kit Co like Blue Point Enginering to put a kit together. I'm not sure how much RJ would want to keep this preparatory.
Jess
Title: Re: Important information for all members to read
Post by: RJ on January 04, 2011,
Already looked into it. The cost drove prices up a way too much!

RJ
Title: Re: Important information for all members to read
Post by: jess_her on January 04, 2011,
With your permission RJ I have a friend in the pinball repair business.  He is A LOR guy but would love this site. He might be willing to buy for the COOP under his Licence but I'm not sure what the Washington state tax implications would be.
Jess
Title: Re: Important information for all members to read
Post by: LondoB5 on January 04, 2011,
I could run a co-op through one of my companies as well, but it would have to be 100% on the level. I would not be interested in doing anything that either would violate the law or cause me to be subjected to an audit because of suspicous bookkeeping. Also, all fees for the coop, including applicable state taxes, paypal fees, etc. would need to be covered. Also, for me to run a coop thru one of my companies, everything would need to be  shipped from one of my company locations (either NJ or Pa). Since the gov't would require proof of shipped goods.
I'm not sure that I would have any amount of time to be able to do this on the near term, though.
...there must be other members with their own businesses and business paypal accounts that could accomodate this kind of dollar value AND have the time necessary to do it.

JMHO
Title: Re: Important information for all members to read
Post by: RJ on January 05, 2011,
First I want to be clear,

  We will not be doing anything that is not legal nor have I in the past.  We are not going to have companies running coops or anything like that. This is DIY and too many of the diy operations have already slipped into the commerical sector as far as I am concerened.

There is noting illegal about coops I am not sure where this is coming up from. This threaded got polluted into talking about hiding money from the IRS. I just did not want to have to do all the extra work but that is the only way to do it so as stated coop managers will need to keep good records so they can show every expense of the coop to offset the income they get from the members. In effect prove they did not make money from the coop.

This is an old topic and I think it has served it purpose.
RJ

RJ