Building rods has always been a hobby for me but occasionally I'll build for friends and family. Lately this has expanded to "friend's of friends" and others I don't know personally but have some connection with. This is limited to about 5 to 10 rods per year and with not knowing some of these people I don't want to cross into the "commercial" building world and not even know it. Can I get in trouble for this? I really don't want to go through the hoops of getting a business and tax ID for only a few rods per year but also don't want to get into trouble with the IRS. If you don't know how to spell "the IRS" it is T-H-E-I-R-S. (T-E-H-I-R-S for Vivona).

If you build and sell just one rod, you are a manufacturer ad liable for the Sportsfishing Excise Tax on that (and other) rod/s.

Can you get in trouble for this? Yes, if they find out about it. At least if you're charging for them. At that point, you need to be filing the quartery 720 excise tax form and a schedule C profit and loss statement to go along with your 1040.

You should also be charging your applicable state sales tax.

If you're simply giving away your rods then there is no tax liability.

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As Tom has pointed out ... without proper documentation and collection, even one rod and you have breached both Federal and State tax laws PLUS local (county/city) business laws.

Another issue that always concerns me - product liability. Without all the licenses AND insurance protection ... an injury could really send you scrambling OR cleaning out the bank accounts on the way to Mexico. Unfortunately, we live in a very litigious society - not having proper protection is asking for trouble IMO.

Also, there are quite a few local tackle shops, licensed builders, etc. that WILL turn in those that are not fully in compliance, when discovered. So ... if you are going to build without licenses and collection - be aware of the possible consequences.


P.S. Personal note to Scott - IF you want to get all setup ... you can come over and I will give you the 10 cent tour on the forms, etc. and help you register with the state and federal agencies.



Edited 1 time(s). Last edit at 03/17/2008 10:08AM by Jim Gamble.

Anyone have any idea of who to talk to at the local level to get setup correctly?

Federal law requires Form 720 (Excise Tax) to be filed quarterly.

You must register for a FEIN (Federal Employer Identification Number) to file quarterly excise returns. Registering for a FEIN can be done online through the IRS website at www.irs.gov. You will need your business name, etc. BEFORE doing that.

State laws ... check with your particular State Department of Revenue (or whatever it is called).

City/County laws ... check with the agencies themselves. In most cases, you are only obtaining business/professional licenses. Although, there are municipalities that have taxes and other issues as well ... especially in the northern US.

IMO, one should seek the advice of a competent CPA, attorney and insurance agent.

Is it going to be cheap ... NO. However, it isn't all that daunting either ... it can be a bit frustrating and most likely it will be highly enlightening. But that is the difference between a personal hobby (self) and a professional business (public).

I talked to one tax specialist who advised me that doing a few rods a year would likely be classified as a hobby, and that the IRS wasn't interested in collecting "hobby" money.

Pure @#$%&.

SInce I also work in acconting I took this advice as being on the "poor" side- and you should too.

I went thru the licensing and paperwork myself just this year, it isn't a big deal, but there will be some fees and paperwork associated with it, and you may need to check with your locale in tems of "zoning" laws, if you plan to apply for a businees license for your home residence.

There is the possibility if that you lose money (take a net loss on the business- the IRS may declare you a hobby- and disallow a net loss as an offset to your regular income- if it appears you are trying to avoid taxes by using ordinary income to support a "hobby", they will hit you with that.

There is a definite upside to getting the license- you will be able to get many of your components-blanks, guides, etc. from your suppliers at a wholesale rate.


Jim- I haven;t yet looked into the liability insurance aspect- but have considered it. What type of insurance would this be and what amounts are needed- I hate to ask that question to my insurance company- they 'll be more than happy to sell me insurance I don't need or understand exactly what I am getting.

I've spent many hours in Washington, DC with excise tax folks at the IRS. I can assure anyone that if you build and sell even one rod, the IRS will hold you liable for the appropriate excise tax.

The excise tax is still due even if you lose money on your business - the excise tax applies to the sale of the rod, not the profit or loss you incurred. Any loss is only applicable on your schedule C form, which is the profit and loss statement you file in additional to your regular 1040 income tax form.

If you spend $500 building a rod and sell it for $200, you may have lost $300, but you (your customer, actually) owes the IRS $10 from the sale of that rod. Read the excise tax article in the online library here for the full information.

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Hi,

Go straight to your accountant! Make sure the accountant is well versed in Excise Tax laws. Many IRS agents do not understand how the Excise Tax System works. This was told to us at a seminar by a very knowledgeable IRS Specialist!

The year after I started my legal rod building business I received a letter from the IRS saying that I had to make an appointment with them for them to come "check out my manufacturing facility"!!! What??? They consider us to be manufacturers. So I had an IRS agent here for 3 hours. I do have to say that he was very helpful and his tips work. A year or two later I had to go thru with it again.

His best tip was to get a free checking account for the business. This way he can only ask to see the business check book and your private check book stays private.

If the IRS agent asks for page 3 of last years tax forms just give him what he asks for, only page 3 or whatever. I gave him my complete tax form which could have been a mistake if I had something to hide. It seems that if I gave him more than he asked for it was now his to read.

In New York State we have to file quarterly or yearly. In any given period if you collect no sales taxes you still have to file a form saying so. The same goes for shutting down the business, you have to file the forms in the next period saying so. When you don't file a form is when the trouble starts.

You have to determine if this is all worth the trouble.

Capt Neil Faulkner

Capt. Neil - how right you are- the same tax "specialist" that told me the IRS wasn' interested in "hobby" money had never heard of the excise tax.

Needless to say , I vacated her office with less than a stellar opinion of her "expertise".

I was hesitant to ask this question through the internet for obvious reasons but everyone I've asked didn't know the awnser, so I took a roll of the dice. I was thinking about asking my accountant as mentioned above but then remembered that I didn't have an accountant and can't justify the expense for a few rods a year. Thanks for the help.

Folks I am a CPA (although no longer in public practice) and here is what I would recommend (and do myself if I were starting a new business). First get GOOD legal and tax advice. That means an Attorney familiar with small business and a CPA that knows about Excise taxes and such (like attorneys not all CPA's do that type of tax work). I would recommend looking into the "LLC" for your business and there are many other details that could make a difference somewhere down the road. Remember most new businesses do not make it past a couple of years so be realiatic and prepared for it. Now the hard part is that even on a small scale the tax liability and perhaps personal liability is still possible. So you do a rod for your brother in law, probably not a problem (depending on brother in law!), and assuming he does not "pay" you for it. But you sell a few to pay for your habit, then it is an issue. My point is it only costs you a couple of trips and for the piece of mind knowing every thing is done right is worth it. And even if you can probably do all the paperwork from the references above if you are considering full time it is worth it to get everything done right from the start. And yes liability insurance would be high on my list as well!

The IRS okayed the article in the online library (even used it for informing their own field agents) so trust what it says. It will inform you better than most accountants or even some IRS field agents who aren't familar with this tax.

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This part always confused me....

"Here's how it works - lets say you sell a custom rod to your customer for $300. Instead of figuring a 10% tax of $30, you would create a Constructive Sale Price by multiplying $300 by 60% (300 x .60), which is $180. The tax (10%) is now due on that amount ($180). Your customer would be charged $300 for the rod, $18 for the excise tax, and any applicable sales taxes your state or county impose. "

That works out to 6%, so why not just say that?

Chuck! The law was changed in 2005 to put a $10 cap on the tax. The tax now due on a $300 rod would be $10

Mike (Southgate, MI)
If I don't want to, I don't have to and nobody can make me (except my wife) cuz I'm RETIRED!!



Edited 1 time(s). Last edit at 03/17/2008 02:15PM by Mike Barkley.

Yepper, but on a rod of "$160 or less" why not just say 6%? In case you're wondering.... I give a discount to leagues as prizes. I'm not getting rich at less than $160 a rod! ;)

It's a little confusing but the article in the library above explains the reason for it.

Mike (Southgate, MI)
If I don't want to, I don't have to and nobody can make me (except my wife) cuz I'm RETIRED!!

Chuck,

That's because the tax is based on 10% of the wholesale price, or the price normally charged at the first point of sale.

For many custom rod builders, the first point of sale is at the retail level so the IRS has allowed us a "constructive sales price" based on 60% of retail for figuring the tax.

Read the article for the particulars. The 60% "rule" does not hold in all situations so just saying you owe "6%" would not put you in compliance in many instances.

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Got it, thanks!

Would rod sales be considered Retail Sales?

Sales are sales. Sales to the end user (fisherman) is a retail sale. Sales to a reseller (tackle shop, etc.) would be a wholesale or jobber sale.

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