Today I wanted to talk about the possible tax consequences of Obama’s proposed executive order on guns. This article is not about politics or gun control and not really about guns at all, just the tax consequences of his new rule.
So here goes:
Over the last seven years, Obama has actively sought to impose gun controls on this country. He has consistently failed, even when terrible tragedies have created a temporary climate in which such gun restriction laws would seem to be more politically appealing.
As a result of his failures, this week Obama stated one of his top priorities for 2016 would be an executive order on gun control. He argued that Congressional inaction made an executive order necessary. Of course, the truth is Congress has not been inactive. It has, on a bipartisan basis, vigorously opposed his gun control efforts.
So now, we have a new executive order which, according to Loretta Lynch, will cause someone who sells as few as one single gun to be considered in the business ( if the gun is sold in original packaging, through use of a credit card, or sold shortly after it’s acquired). Such sellers will be deemed to be in the gun business and must spend much time and money to register as a dealer and go through the time and expense of obtaining and maintaining a Federal Firearm License, and to do background checks on anyone we transfer a gun to.
- Federal Tax Law – Presently
The federal tax law provides that expenses from a hobby are not deductible. Thus, when someone buys a gun, uses it, and resells it, that gun has lost some of its value and the loss on that sale is not deductible.
Likewise, the expenses of gun enthusiasts are not deductible. The millions of people who legally collect guns as a hobby, or who travel to enter shooting competitions, or who enjoy long range shooting or go to trap and skeet shotgun events—all these expenses are non-deductible because they are related to a hobby.
These expenses can be quite substantial. For example, there is often a dedicated area of a house or garage or storage area to keep the guns, to clean and repair them, to reload shells saving on ammunition costs, etc. There’s also the expenses of travel, including the use of an automobile and oftentimes overnight stays at hotels. Then there’s the cost of meals, both at home and away from home. All of these are non-deductible hobby expenses.
And what about the tens of millions of people who buy guns for self-defense? These people may have one in their home and carry one on their person. Perhaps they carry one in their car. These people typically buy ammunition, join a gun range to practice, and may take shooting lessons regularly. Yep, same result, all are non-deductible hobby expenses.
And, it goes on and on. The common thread here is that tens of millions of gun owners regularly buy or sell a gun and ammunition,etc. for a variety of reasons, incur many expenses in doing so and cannot deduct any of those costs.
- Federal Tax Law – Obama’s Executive Order
Let’s assume for a moment that Obama’s order is not suspended by the Courts like his immigration order was. Let’s also assume that the next President leaves it in place. Though both are highly unlikely scenarios since both Republicans and Democrats oppose his order, for purposes of this article, let’s assume it stays.
By executive order, Obama has found millions of Americans to be in the business of selling guns even if only one is sold. They now must incur the expensive process of becoming registered gun dealers. This includes the cost of acquiring a Federal Firearm License, maintaining same, and doing background checks on customers, etc.
Here is my speculation of the tax consequences of his unilateral action:
- Millions of hobbyists will either voluntarily or involuntarily become registered gun dealers. Due to the new costs of doing so, they may be considered to be in the business of selling guns (for several reasons too lengthy to describe here) and thus those previously non-deductible hobby expenses may now become deductible business expenses.
- Tens of millions of hobbyists will avoid the law either by selling on the black market or more likely, by selling to a real gun dealer—larger, professional gun businesses who do this for a living and routinely conduct background checks. This will cause tens of millions of used guns to decrease dramatically in price as they must now include the cost of these transfers and dealer markups while the prices of new guns are not increasingly significantly.
My prediction is therefore that tens of millions of people may now be able to file a Schedule C on their personal tax returns and deduct their hobby expenses and also the losses on the sales of their used guns.
And ironically—from a non-tax point of view—I predict more and more used guns will be sold because their diminishing value makes them cheaper and cheaper to buy.