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
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Published in: on October 15, 2013 at 1:21 pm  Leave a Comment  
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Tips for Taxpayers Who Owe Taxes

Tips for Taxpayers Who Owe Taxes

TAX PROBLEMS – While most taxpayers get a refund from the IRS when they file their taxes, some do not. The IRS offers several payment options for those who owe taxes.

Here are eight tips for those who owe federal taxes.
1. Tax bill payments. If you get a bill from the IRS this summer, you should pay it as soon as possible to save money. You can pay by check, money order, cashier’s check or cash. If you cannot pay it all, consider getting a loan to pay the bill in full. The interest rate for a loan may be less than the interest and penalties the IRS must charge by law.
2. Electronic Funds Transfer. It’s easy to pay your tax bill by electronic funds transfer. Just visit IRS.gov and use the Electronic Federal Tax Payment System.
3. Credit or debit card payments. You can also pay your tax bill with a credit or debit card. Even though the card company may charge an extra fee for a tax payment, the costs of using a credit or debit card may be less than the cost of an IRS payment plan.
4. More time to pay. You may qualify for a short-term agreement to pay your taxes. This may apply if you can fully pay your taxes in 120 days or less. You can request it through the Online Payment Agreement application at IRS.gov. You may also call the IRS at the number listed on the last notice you received. If you can’t find the notice, call 800-829-1040 for help. There is generally no set-up fee for a short-term agreement.
5. Installment Agreement. If you can’t pay in full at one time and can’t get a loan, you may want to apply for a monthly payment plan. If you owe $50,000 or less, you can apply using the IRS Online Payment Agreement application. It’s quick and easy. If approved, IRS will notify you immediately. You can arrange to make your payments by direct debit. This type of payment plan helps avoid missed payments and may help avoid a tax lien that would damage your credit.
6. Offer in Compromise. The IRS Offer-in-Compromise program allows you to settle your tax debt for less than the full amount you owe. An OIC may be an option if you can’t fully pay your taxes through an installment agreement or other payment alternative. The IRS may accept an OIC if the amount offered represents the most IRS can expect to collect within a reasonable time. Use the OIC Pre-Qualifier tool to see if you may be eligible before you apply. The tool will also direct you to other options if an OIC is not right for you.
7. Fresh Start. If you’re struggling to pay your taxes, the IRS Fresh Start initiative may help you. Fresh Start makes it easier for individual and small business taxpayers to pay back taxes and avoid tax liens.
8. Check withholding. You may be able to avoid owing taxes in future years by increasing the taxes your employer withholds from your pay. To do this, file a revised Form W-4, Employee’s Withholding Allowance Certificate, with your employer. The IRS Withholding Calculator tool at IRS.gov can help you fill out a new W-4.

For more information about payment options or IRS’s Fresh Start program, contact us today to get a free consultation!
ABA Tax Accounting
651-621-5777 or (763) 269-5396
info@abataxaccounting.com
http://abataxaccounting.com/incometaxserviceforindividuals.php
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Published in: on August 2, 2013 at 2:48 pm  Leave a Comment  
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IRS Highlights Simplified Option for Home Office Deduction

Tax Strategies For Business Owners – Do you work from home? If so, you may be familiar with the home office deduction, available for taxpayers who use their home for business. Beginning this year, there is a new, simpler option to figure the business use of your home.

This simplified option does not change the rules for who may claim a home office deduction. It merely simplifies the calculation and recordkeeping requirements. The new option can save you a lot of time and will require less paperwork and recordkeeping.

Here are six facts the IRS wants you to know about the new, simplified method to claim the home office deduction.

1. You may use the simplified method when you file your 2013 tax return next year. If you use this method to claim the home office deduction, you will not need to calculate your deduction based on actual expenses. You may instead multiply the square footage of your home office by a prescribed rate.

2. The rate is $5 per square foot of the part of your home used for business. The maximum footage allowed is 300 square feet. This means the most you can deduct using the new method is $1,500 per year.

3. You may choose either the simplified method or the actual expense method for any tax year. Once you use a method for a specific tax year, you cannot later change to the other method for that same year.

4. If you use the simplified method and you own your home, you cannot depreciate your home office. You can still deduct other qualified home expenses, such as mortgage interest and real estate taxes. You will not need to allocate these expenses between personal and business use. This allocation is required if you use the actual expense method. You’ll claim these deductions on Schedule A, Itemized Deductions.

5. You can still fully deduct business expenses that are unrelated to the home if you use the simplified method. These may include costs such as advertising, supplies and wages paid to employees.

6. If you use more than one home with a qualified home office in the same year, you can use the simplified method for only one in that year. However, you may use the simplified method for one and actual expenses for any others in that year.

Considering a Tax Professional? For no obligation free consultation about home office deductions contact us today!
ABA Tax Accounting
651-621-5777 or 763-269-5396
info@abataxaccounting.com
http://www.abataxaccounting.com
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Published in: on July 30, 2013 at 3:39 pm  Leave a Comment  
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NET INVESTMENT INCOME TAX: WHAT YOU NEED TO KNOW

Income Tax Service For Small Businesses – Now that the 2012 tax season is over, it’s time to focus on tax planning for 2013. One of the most significant tax changes this year is the Net Investment Income Tax (NIIT), which went into effect on January 1, 2013 as a result of health care reform enacted in 2010. Here’s what you need to know.

WHAT IS THE NET INVESTMENT INCOME TAX?
The Net Investment Income Tax is a 3.8% tax on certain net investment income of individuals, estates, and trusts with income above statutory threshold amounts, referred to as modified adjusted gross income (MAGI).

WHAT IS INCLUDED IN NET INVESTMENT INCOME?
In general, investment income includes, but is not limited to: interest, dividends, long and short term capital gains, rental and royalty income, non-qualified annuities, income from businesses involved in trading of financial instruments or commodities, and passive business activities such as rental income or income derived from royalties.

WHAT IS NOT INCLUDED IN NET INVESTMENT INCOME?
Wages, unemployment compensation, operating income from a nonpassive business, Social Security Benefits, alimony, tax-exempt interest, self-employment income, Alaska Permanent Fund Dividends, and distributions from certain Qualified Plans are not included in net investment income.

INDIVIDUALS
Individuals whose modified adjusted gross income exceeds $250,000 (married filing jointly) or $200,000 (single filers) are taxed at a flat rate of 3.8% on investment income. Net Investment Income Tax is paid in addition to other taxes owed and threshold amounts (e.g. $200,000 for single filers) are not indexed for inflation.

Non-resident aliens are not subject to the tax; however, if a non-resident alien is married to a US citizen and is planning to file as a resident alien for the purposes of filing “married filing jointly” tax return, there are special rules. Please consult us if you have any questions.

Because investment income is generally not subject to withholding, taxpayers should be aware that the NIIT might affect tax liability for the 2013 tax year. In addition, it’s possible that even lower income taxpayers not meeting the threshold amounts could be subject to the tax if they receive a windfall such as a one-time sale of assets that bumps their MAGI up high enough.

Give us a call if you are expecting a windfall this year. We’ll help you come up with a strategy such as an installment sale, minimizing AGI, or figuring out the best timing for sale, that will help you to avoid or minimize taxes when you file your 2013 return next year.

SALE OF A HOME
The Net Investment Income Tax does not apply to any amount of gain excluded from gross income for regular income tax purposes ($250,000 for single filers and $500,000 for a married couple) on the sale of a principal residence. In other words, only the taxable part of any gain on the sale of a home has the potential to be subject to NIIT, providing the taxpayer’s income is over the MAGI threshold amount.

ESTATES AND TRUSTS
Estates and Trusts are subject to the Net Investment Income Tax if they have undistributed net investment income and also have adjusted gross income over the dollar amount at which the highest tax bracket for an estate or trust begins for such taxable year. In 2013, this threshold amount is $11,950.

Special rules apply for certain unique types of trusts such a Charitable Remainder Trusts and Electing Small Business Trusts, and some trusts, including “Grantor Trusts” and Real Estate Investment Trusts (REIT) are not subject to NIIT at all.

It should be noted that non-qualified dividends generated by investments in a REIT are considered taxable income and taxed at ordinary tax rates. As such, they may be subject to the Net Investment Income Tax.

If you need guidance on the topic of Net Investment Income Tax and estates and trusts, don’t hesitate to call us.

REPORTING AND PAYING THE NET INVESTMENT INCOME TAX
Individual taxpayers should report (and pay) the tax on Form 1040. Estates and Trusts report (and pay) the tax on Form 1041.

Individuals, estates, and trusts that expect to pay estimated taxes in 2013 should adjust their income tax withholding or estimated payments to account for the tax increase in order to avoid underpayment penalties. For employed individuals, NIIT is not withheld from wages; however, you may request that additional income tax be withheld. Call us if you need assistance with this.

Wondering how the new tax affects you? Give us a call. It’s never too early to start tax planning!
ABA Tax Accounting
651-621-5777 After Hours: (612)424-1540
info@abataxaccounting.com
http://www.abataxaccounting.com/smallbusinessaccounting.php
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Published in: on June 10, 2013 at 5:14 pm  Leave a Comment  
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It’s not too late to file your 2011 tax return

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Income tax Services – Believe it or not, your kids don’t always have to separate you from your money. Sometimes they can actually help you keep some. If you haven’t filed your 2011 tax return yet, you have five good reasons to file today.  

Adoption Credit

You may be able to take a tax credit for qualifying expenses paid to adopt an eligible child. In general, the credit is based on the reasonable and necessary expenses related to a legal adoption, including adoption fees, court costs, attorney’s fees and travel expenses. For tax year 2011, the adoption credit, at up to $13,360 per child, is the largest refundable tax credit available to individual taxpayers.

Child Tax Credit

You may be able to take this credit for each of your children under age 17. The Child Tax Credit may be worth as much as $1,000 per qualifying child depending on your income. If you can’t claim the full amount of the Child Tax Credit, you may be eligible for the Additional Child Tax Credit. 

Child and Dependent Care Credit

You may be able to claim the Child and Dependent Care Credit if you pay someone to care for your children, age 13 or younger, so you can work or look for work.

Earned Income Tax Credit

The EITC is a tax benefit for people who work and have earned income from wages, self-employment or farming. EITC reduces the amount of tax owed and may also give a refund. To qualify, you must meet certain requirements and file a tax return — even if you don’t owe any tax or aren’t required to file, you must file to claim the credit.

Education Credit

Education tax credits can help offset the costs of higher education by letting people claim qualifying education-related expenses. The American Opportunity Tax Credit and the Lifetime Learning Credit can be subtracted in full from federal income tax, not just deducted from taxable income. A portion of the American Opportunity Tax Credit is refundable if no other outstanding debt exists.

For information about these credits and much, contact us today to for 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

Like to get out of a tax debt caused by misdeeds committed by your spouse?

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Innocent Spouse Relief – Did you know that you can get out of the tax debt due to the misdeeds or fraud committed by your spouse? Innocent Spouse Relief was designed to alleviate unjust situations where one spouse was clearly the victim of fraud perpetrated by their spouse or ex-spouse. 

If you qualify for Innocent Spouse Relief, you may not owe any tax. Please contact us for Free Consultation to see if you qualify for Innocent Spouse Relief.

ABA Tax Accounting

Amare Berhie, Senior Tax Accountant

amare@abataxaccounting.com

612-282-3200

866-936-0430 Toll free

www.abataxaccounting.com

www.abatax81.blogspot.com

www.abataxaccounting.wordpress.com

Back-to-School Tips for Students and Parents Paying College Expenses

Federal, State, Local and International Taxes – Whether you’re a recent high school graduate going to college for the first time or a returning student, it will soon be time to head to campus, and payment deadlines for tuition and other fees are not far behind.

The IRS offers some tips about education tax benefits that can help offset some college costs for students and parents. Typically, these benefits apply to you, your spouse or a dependent for whom you claim an exemption on your tax return.

  • American Opportunity Credit. This credit, originally created under the American Recovery and Reinvestment Act, is still available for 2012. The credit can be up to $2,500 per eligible student and is available for the first four years of post secondary education at an eligible institution. Forty percent of this credit is refundable, which means that you may be able to receive up to $1,000, even if you don’t owe any taxes. Qualified expenses include tuition and fees, course related books, supplies and equipment.
  • Lifetime Learning Credit. In 2012, you may be able to claim a Lifetime Learning Credit of up to $2,000 for qualified education expenses paid for a student enrolled in eligible educational institutions. There is no limit on the number of years you can claim the Lifetime Learning Credit for an eligible student.

You can claim only one type of education credit per student in the same tax year. However, if you pay college expenses for more than one student in the same year, you can choose to take credits on a per-student, per-year basis. For example, you can claim the American Opportunity Credit for one student and the Lifetime Learning Credit for the other student.

  • Student loan interest deduction. Generally, personal interest you pay, other than certain mortgage interest, is not deductible. However, you may be able to deduct interest paid on a qualified student loan during the year. It can reduce the amount of your income subject to tax by up to $2,500, even if you don’t itemize deductions.

These education benefits are subject to income limitations, and may be reduced or eliminated depending on your income. For more information 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

Offer-in-Compromise Help Taxpayers Make a Fresh Start

Tax Problems – The IRS has expanded its “Fresh Start” initiative by offering more flexible terms to its Offer-in-Compromise Program. These newest rules enable some financially distressed taxpayers to clear up their tax problems even quicker. 

An offer-in-compromise (OIC) is an agreement between a taxpayer and the IRS that settles the taxpayer’s tax liabilities for less than the full amount owed. An OIC is generally not accepted if the IRS believes the liability can be paid in full as a lump sum or through a payment agreement. The IRS looks at the taxpayer’s income and assets to determine the reasonable collection potential. 

This expansion of the “Fresh Start” initiative focuses on the financial analysis used to determine which taxpayers qualify for an OIC. For more information on the “Fresh Start” initiative contact us today to get a free consultation!

ABA Tax Accounting

Amare Berhie, Tax Advisor

amare@abataxaccounting.com

612-282-3200

866-936-0430 Toll Free

http://abataxaccounting.com

www.abatax81.blogspot.com

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Tips to Reduce Big Refunds and Prevent Tax Bills

Federal, State, Local and International Taxes – The Internal Revenue Service reminds taxpayers that it’s not too late to adjust their 2012 tax withholding to avoid big tax refunds or tax bills when they file their tax return next year. 

Taxpayers should act soon to adjust their tax withholding to bring the taxes they must pay closer to what they actually owe and put more money in their pocket right now. 

Most people have taxes withheld from each paycheck or pay taxes on a quarterly basis through estimated tax payments. Each year millions of American workers have far more taxes withheld from their pay than is required. Many people anxiously wait for their tax refunds to make major purchases or pay their financial obligations. The IRS encourages taxpayers not to tie major financial decisions to the receipt of their tax refund – especially if they need their tax refund to arrive by a certain date. 

Here is some information to help bring the taxes you pay during the year closer to what you will actually owe when you file your tax return. 

Employees

  • New Job – When you start a new job your employer will ask you to complete Form    W-4, Employee’s Withholding Allowance Certificate. Your employer will use this form to figure the amount of federal income tax to withhold from your paychecks. Be sure to complete the Form W-4 accurately.
  • Life Event You may want to change your Form W-4 when certain life events happen to you during the year. Examples of events in your life that can change the amount of taxes you owe include a change in your marital status, the birth of a child, getting or losing a job, and purchasing a home. Keep your Form W-4 up-to-date.

You typically can submit a new Form W–4 at anytime you wish to change the number of your withholding allowances. However, if your life event results in the need to decrease your withholding allowances or changes your marital status from married to single, you must give your employer a new Form W-4 within 10 days of that life event. 

Self-Employed

  • Form 1040-ES. If you are self-employed and expect to owe a thousand dollars or more in taxes for the year, then you normally must make estimated tax payments to pay your income tax, Social Security and Medicare taxes. You can use the worksheet in Form 1040-ES, Estimated Tax for Individuals, to find out if you are required to pay estimated tax on a quarterly basis. Remember to make estimated payments to avoid owing taxes at tax time.

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

Correctly reporting rental real estate

Federal, State, Local and International Taxes – Individuals who are not real estate professionals are generally subject to passive activity loss limitations even if they materially participate in the rental.

Real estate professionals report rental real estate activities in which they materially participated as non-passive. But, real estate professionals who do not materially participate in the rental activity are generally subject to passive activity loss limitations.

For more information 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

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