HOBBY OR BUSINESS? WHY IT MATTERS

HOBBY OR BUSINESS? WHY IT MATTERS

Income Tax Service For Small Businesses – Millions of Americans have hobbies such as sewing, woodworking, fishing, gardening, stamp and coin collecting, but when that hobby starts to turn a profit, it might just be considered a business by the IRS.

DEFINITION OF A HOBBY VS. A BUSINESS
The IRS defines a hobby as an activity that is not pursued for profit. A business, on the other hand, is an activity that is carried out with the reasonable expectation of earning a profit.

The tax considerations are different for each activity so it’s important for taxpayers to determine whether an activity is engaged in for profit as a business or is just a hobby for personal enjoyment.

Of course, you must report and pay tax on income from almost all sources, including hobbies. But when it comes to deductions such as expenses and losses, the two activities differ in their tax implications.

IS YOUR HOBBY ACTUALLY A BUSINESS?
If you’re not sure whether you’re running a business or simply enjoying a hobby, here are some of the factors you should consider:
• Does the time and effort put into the activity indicate an intention to make a profit?
• Do you depend on income from the activity?
• If there are losses, are they due to circumstances beyond your control or did they occur in the start-up phase of the business?
• Have you changed methods of operation to improve profitability?
• Do you have the knowledge needed to carry on the activity as a successful business?
• Have you made a profit in similar activities in the past?
• Does the activity make a profit in some years?
• Do you expect to make a profit in the future from the appreciation of assets used in the activity?

An activity is presumed to be for profit if it makes a profit in at least three of the last five tax years, including the current year (or at least two of the last seven years for activities that consist primarily of breeding, showing, training, or racing horses).

The IRS says that it looks at all facts when determining whether a hobby is for pleasure or business, but the profit test is the primary one. If the activity earned income in three out of the last five years, it is for profit. If the activity does not meet the profit test, the IRS will take an individualized look at the facts of your activity using the list of questions above to determine whether it’s a business or a hobby. (It should be noted that this list is not all-inclusive.)

Business Activity: If the activity is determined to be a business, you can deduct ordinary and necessary expenses for the operation of the business on a Schedule C or C-EZ on your Form 1040 without considerations for percentage limitations. An ordinary expense is one that is common and accepted in your trade or business. A necessary expense is one that is appropriate for your business.

Hobby: If an activity is a hobby, not for profit, losses from that activity may not be used to offset other income. You can only deduct expenses up to the amount of income earned from the hobby. These expenses, with other miscellaneous expenses, are itemized on Schedule A and must also meet the 2 percent limitation of your adjusted gross income in order to be deducted.

WHAT ARE ALLOWABLE HOBBY DEDUCTIONS?
If your activity is not carried on for profit, allowable deductions cannot exceed the gross receipts for the activity.

Note: Internal Revenue Code Section 183 (Activities Not Engaged in for Profit) limits deductions that can be claimed when an activity is not engaged in for profit. IRC 183 is sometimes referred to as the “hobby loss rule.”

Deductions for hobby activities are claimed as itemized deductions on Schedule A, Form 1040. These deductions must be taken in the following order and only to the extent stated in each of three categories:
• Deductions that a taxpayer may claim for certain personal expenses, such as home mortgage interest and taxes, may be taken in full.
• Deductions that don’t result in an adjustment to the basis of property, such as advertising, insurance premiums, and wages, may be taken next, to the extent gross income for the activity is more than the deductions from the first category.
• Deductions that reduce the basis of property, such as depreciation and amortization, are taken last, but only to the extent gross income for the activity is more than the deductions taken in the first two categories.
If your hobby is regularly generating income, it could make tax sense for you to consider it a business because you might be able to lower your taxes and take certain deductions.

Still wondering whether your hobby is actually a business? Give us a call; we’ll help you figure it out. We’re here to help. For no obligation free consultation contact us today!
ABA Tax Accounting
info@abataxaccounting.com
(952) 583-9108
http://www.abatax81.blogspot.com
http://www.abataxaccounting.wordpress.com
http://www.abataxaccounting.com

Published in: on October 15, 2013 at 1:21 pm  Leave a Comment  
Tags: , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , ,

Is it a Business or Hobby? Answer Has Implications for Deductions

What New Business Owners Need to Know About Taxes

Small Business Accounting – The Internal Revenue Service reminds taxpayers to follow appropriate guidelines when determining whether an activity is a business or a hobby, an activity not engaged in for profit. 

In general, taxpayers may deduct ordinary and necessary expenses for conducting a trade or business. An ordinary expense is an expense that is common and accepted in the taxpayer’s trade or business. A necessary expense is one that is appropriate for the business. Generally, an activity qualifies as a business if it is carried on with the reasonable expectation of earning a profit. 

In order to make this determination, taxpayers should consider the following factors:

  • Does the time and effort put into the activity indicate an intention to make a profit?
  • Does the taxpayer depend on income from the activity?
  • If there are losses, are they due to circumstances beyond the taxpayer’s control or did they occur in the start-up phase of the business?
  • Has the taxpayer changed methods of operation to improve profitability?
  • Does the taxpayer or his/her advisors have the knowledge needed to carry on the activity as a successful business?
  • Has the taxpayer made a profit in similar activities in the past?
  • Does the activity make a profit in some years?
  • Can the taxpayer expect to make a profit in the future from the appreciation of assets used in the activity?

The IRS presumes that an activity is carried on for profit if it makes a profit during at least three of the last five tax years, including the current year — at least two of the last seven years for activities that consist primarily of breeding, showing, training or racing horses. 

If an activity is not for profit, losses from that activity may not be used to offset other income. An activity produces a loss when related expenses exceed income. The limit on not-for-profit losses applies to individuals, partnerships, estates, trusts, and S corporations. It does not apply to corporations other than S corporations. For no obligation free consultation contact us today!

ABA Tax Accounting

Amare Berhie, Senior Tax Accountant

amare@abataxaccounting.com

612-282-3200

866-936-0430 Toll Free

http://www.abataxaccounting.com

www.abatax81.blogspot.com

www.abataxaccounting.wordpress.com

Increased Control Over Business Outcomes

ImageAffordable 100% U.S. Based Outsourcing Solutions – Outsourcing gives companies the ability to manage and organize business results in a variety of critical areas, including increasing reliability, improving cost variability and allowing effective planning and implementation of ideas. For more info or to explore possibilities please contact us today.

ABA Tax Accounting

Amare Berhie, Managing Member

amare@abataxaccounting.com

612-282-3200

866-936-0430 Toll free

http://www.abataxaccounting.com

www.abatax81.blogspot.com

www.abataxaccounting.wordpress.com

Why Outsource?

Low Cost U.S. Based Outsourcing Solutions – Business process outsourcing (BPO) should be an indispensable strategy for any type of business or government seeking new ways to achieve better results by controlling costs, reducing risk, fostering collaboration and increasing transparency. For more info or to explore possibilities please contact us today.

ABA Tax Accounting

Amare Berhie, Managing Member

amare@abataxaccounting.com

612-282-3200

866-936-0430 Toll free

http://www.abataxaccounting.com

www.abatax81.blogspot.com

www.abataxaccounting.wordpress.com

Reduction in expenditures

Low Cost U.S. Based Outsourcing Solutions – Do you want to build up your revenue, reduce your expenses and expand your capabilities at the same time? One of the biggest reasons why businesses seek an outsourcing partner is in order to lower overhead costs and expenses. Immediate savings to the client are derived from the vendor’s lower cost in wages, benefits, and operational expenses. For more info or to explore possibilities please contact us today.

ABA Tax Accounting

Amare Berhie, Managing Member

amare@abataxaccounting.com

612-282-3200

866-936-0430 Toll free

www.abatax81.blogspot.com

www.abataxaccounting.wordpress.com

http://www.abataxaccounting.com

Tips for Taxpayers Who Receive an IRS Notice

Federal, State, Local and International Taxes – Receiving a notice from the Internal Revenue Service is no cause for alarm. Every year the IRS sends millions of letters and notices to taxpayers. In the event one shows up in your mailbox, here are things you should know.

  • Don’t panic. Many of these letters can be dealt with very simply.
  • There are a number of reasons the IRS sends notices to taxpayers. The notice may request payment of taxes, notify you of a change to your account or request additional information. The notice you receive normally covers a very specific issue about your account or tax return.
  • Each letter and notice offers specific instructions on what you need to do to satisfy the inquiry.
  • If you receive a notice about a correction to your tax return, you should review the correspondence and compare it with the information on your return.
  • If you agree with the correction to your account, usually no reply is necessary unless a payment is due.
  • If you do not agree with the correction the IRS made, it is important that you respond as requested. Respond to the IRS in writing to explain why you disagree. Include any documents and information you wish the IRS to consider, along with the bottom tear-off portion of the notice. Mail the information to the IRS address shown in the lower left corner of the notice. Allow at least 30 days for a response from the IRS.
  • Most correspondence can be handled without calling or visiting an IRS office. However, if you have questions, call the telephone number in the upper right corner of the notice. When you call, have a copy of your tax return and the correspondence available.
  • Keep copies of any correspondence with your tax records.

For more information about IRS notices and bills contact us today for no obligation free consultation!

ABA Tax Accounting

Amare Berhie, Senior Tax Accountant

amare@abataxaccounting.com

612-282-3200

866-936-0430 Toll free

http://www.abataxaccounting.com

www.abatax81.blogspot.com

www.abataxaccounting.wordpress.com

100% U.S. Based Outsourcing Solutions

Domestic outsourcing Solutions – By outsourcing certain finance and accounting functions businesses can gain the necessary room for innovation that you need in order to cut on costs, while improving internal controls, and thus driving a transformation of your finance and accounting operations. For more info or to explore possibilities please contact us today.

ABA Tax Accounting

Amare Berhie, Managing Member

amare@abataxaccounting.com

612-282-3200

866-936-0430 Toll free

www.abatax81.blogspot.com

www.abataxaccounting.wordpress.com

http://www.abataxaccounting.com

Entertainment Expenses: Maximizing the Tax Benefits

Tax Strategies for Business Owners

Entertainment Expenses – There are limits and restrictions on deducting meal and entertainment expenses. Most are deductible at 50%, there are a few exceptions. Meals and entertainment must be “ordinary and necessary” and not “lavish or extravagant” and directly related to or associated with your business. They must also be substantiated. For employees who are “fully reimbursed”, the limits are imposed on the employer, not the employee. 

Your home is considered a place conducive to business. As such, entertaining at home may be deductible providing there was business intent and business was discussed. The amount of time that business was discussed does not matter. Likewise, if you hold a small party (less than 12 people) at your home and discuss business with your guests it may be deductible as well. 

Reasonable costs for food and refreshments for year-end parties for employees, as well as sales seminars and presentations held at your home are 100% deductible. 

If you rent a skybox or other private luxury box for more than one event, say for the season, at the same sports arena, you generally cannot deduct more than the price of a non-luxury box seat ticket. Count each game or other performance as one event. ). Deduction for those seats is then subject to the 50% entertainment expense limit. 

If expenses for food and beverages are separately stated, you can deduct these expenses in addition to the amounts allowable for the skybox, subject to the requirements and limits that apply. The amounts separately stated for food and beverages must be reasonable.

Deductions are disallowed for depreciation and upkeep of “entertainment facilities”-yachts, hunting lodges, fishing camps, swimming pools, and tennis courts. Costs of entertainment provided at such facilities are deductible subject to entertainment expense limitations. 

Dues paid to country clubs or to social or golf and athletic clubs are not deductible. Dues that you pay to professional and civic organizations are deductible as long as your membership has a business purpose. Such organizations include business leagues, trade associations, chambers of commerce, boards of trade, and real estate boards. 

Tip: To avoid problems qualifying for a deduction for dues paid to professional or civic organizations, document the business reasons for the membership-the contacts you make and any income generated from the membership.

Entertainment costs, taxes, tips, cover charges, room rentals, maids and waiters are all subject to the 50% limit on entertainment deductions. For no obligation free consultation contact us today!

ABA Tax Accounting

Amare Berhie, Tax Advisor

amare@abataxaccounting.com

612-282-3200

866-936-0430 Toll Free

http://www.abataxaccounting.com

www.abatax81.blogspot.com

www.abataxaccounting.wordpress.com

%d bloggers like this: