Q: I am driven to make jewelry. I want to sell the jewelry I make, and give every penny to various charities that I already support. My thinking is to use the Internet to sell to a broad audience. I can afford to pay for all my materials, as well as buy and manage the e-commerce site, without compensation. I will open a separate bank account and deposit all proceeds. At year’s end, I will divvy up the total among the organizations I’ve identified. I believe this is a great way to feed my compulsion to make jewelry, while raising additional funds for good causes. However, I want to be sure that I do everything by the book. I have two questions. First, will the IRS will expect a cut? Second, do I need to include a statement on the website that purchases from the site aren’t tax deductible?
A: What a fun and generous idea! Think how much more impact charities could make if others would view their hobbies as a source of income for making greater gifts.
Let’s take your second question first, since that’s easier. Yes. Definitely include such a statement – not only on your website, but on your receipts as well. Why? Regardless of how someone argues this, there simply is no deductibility. The buyers are paying you. Unlike a nonprofit, you have no authority to offer deductibility; nor can you serve as an intermediary between the buyer and the charity in this matter. Further, the buyers are paying fair market value for the jewelry. Deductibility only comes in when someone pays an amount over and above the fair market value. Even if you marked up the jewelry considerably, as long as the buyers choose to pay the higher amount, the IRS would likely interpret it as an implicit agreement that the inflated price is the fair market value in the buyers’ minds. Again, no deductibility.
To your first question, you could keep your life simpler if you offer your jewelry as a donation to your favorite charities for them to use as they wish. They could sell the items, auction them, use them as door prizes, or come up with more creative means of making money off them. It might be a hard sell if you are talking quantity because managing the sales takes staffing that diverts the organizations from their mission. But, if they go for it, you would get to design and fabricate to your heart’s content, and bask in the knowledge that you are providing a source of funding to your favorite charities. You could even take a deduction for the cost of your materials. And, you would save yourself all the added work and expense of establishing and maintaining an e-commerce site, marketing it, creating enough inventory to meet specific orders, preparing the jewelry to ship, dealing with credit card companies, explaining to people why there is no deductibility and why they may have to pay sales tax, collecting and remitting sales tax, reconciling your sales records, and more.
If you still want to move forward with the online merchandizing of your work, as you surmised, there are tax issues to consider. I mentioned sales tax above. Again, since you are not operating a nonprofit, you are not exempt from the collection and remittance of sales tax. It is expected that you will ensure that anyone within your own state who purchases a piece of yours will pay the appropriate sales tax, based on the percentage the state charges, plus any surcharges dictated by the county in which he or she resides. The burden falls to you to collect that money, and send it into the state with a report. In addition, at least in my state of Florida, businesses require a sales tax permit. If you ever decide to expand by selling your jewelry on other sites, such as Etsy or Amazon, or in retail outlets in other states, you may have to collect and submit sales tax in other states as well. The rules vary, but as states become starved for revenue, they are establishing more and more conditions under which you have to collect and remit sales tax to them.
You touched on the second tax issue in your question… Whether you give away just a few of your proceeds, or all of them, the IRS wants to know when you are receiving income of any sort. Your state and local governments may want that information as well. They may also require business licenses – renewed annually with a fee. The nonprofit CPA I consulted said you will need to operate as a Schedule C hobby, and note this on your personal taxes. Since you are responsible only for paying taxes on your net profits, and you can take a deduction for the materials you donate, such taxes may be moot. Check out Schedule A and, of course, run all this by your own accountant.
Regardless of how you end up approaching this, all I can say is that the charities on your list are lucky to have your commitment and support.