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: , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , ,

Good Reasons to E-file Your Tax Return – http://www.abataxaccounting.com/taxservice.php

Federal, State, Local and International Taxes – If you haven’t tried IRS e-file before, now is the time. Most taxpayers – more than 80 percent – file electronically. The IRS has processed more than 1 billion individual tax returns safely and securely since the nationwide debut of electronic filing in 1990. Fewer people file a paper tax return every year. Here are five good reasons to e-file your tax return:

  • Accurate and complete. E-file is the best way to file an accurate and complete tax return. Tax returns that are incomplete or include errors take longer to process.
  • Safe and secure. Tax preparers and software companies who e-file must meet strict guidelines and provide the best in encryption technology. You receive an acknowledgement within 48 hours that the IRS received your tax return. If the IRS does not accept your tax return, you will receive notification and can quickly correct your return and resubmit it.
  • Faster refunds. An e-filed tax return usually means a faster refund compared to a paper return. The IRS issues most refunds in less than 21 days. If you choose direct deposit, your refund goes directly into your bank account. Combining e-file with direct deposit is the fastest way to get your refund. About three out of four taxpayers who file receive a tax refund. Last year the average refund was about $2,700.
  • Payment options. If you owe tax, you can e-file early and set an automatic payment date anytime on or before the April 15 due date. You can pay by check or money order, by debit or credit card, or by transferring funds electronically from your bank account.
  • It’s easy. You can e-file on your own through IRS Free File, the free tax preparation and e-filing service available exclusively at IRS.gov. You can also use commercial tax preparation software or ask your tax preparer to e-file your return. And, if you qualify, IRS Volunteer Income Tax Assistance and Tax Counseling for the Elderly partners will e-file your return for free.

For no obligation free consultation contact us today!

ABA Tax Accounting

info@abataxaccounting.com

612-282-3200

866-936-0430 Toll Free

http://www.abataxaccounting.com

www.abataxaccounting.wordpress.com

www.abatax81.blogspot.com

Published in: on January 30, 2013 at 7:15 pm  Leave a Comment  
Tags: , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , ,

Tax Strategies – Who Should File a 2012 Tax Return?

Tax Strategies – Who Should File a 2012 Tax Return?

Federal, State, Local and International Taxes – If you received income during 2012, you may need to file a tax return in 2013. The amount of your income, your filing status, your age and the type of income you received will determine whether you’re required to file. Even if you are not required to file a tax return, you may still want to file. You may get a refund if you’ve had too much federal income tax withheld from your pay or qualify for certain tax credits. 

Even if you’ve determined that you don’t need to file a tax return this year, you may still want to file. Here are five reasons why: 

1. Federal Income Tax Withheld.  If your employer withheld federal income tax from your pay, if you made estimated tax payments, or if you had a prior year overpayment applied to this year’s tax, you could be due a refund. File a return to claim any excess tax you paid during the year. 

2. Earned Income Tax Credit.  If you worked but earned less than $50,270 last year, you may qualify for EITC. EITC is a refundable tax credit; which means if you qualify you could receive EITC as a tax refund. Families with qualifying children may qualify to get up to $5,891 dollars. You can’t get the credit unless you file a return and claim it. Use the EITC Assistant to find out if you qualify. 

3. Additional Child Tax Credit.  If you have at least one qualifying child and you don’t get the full amount of the Child Tax Credit, you may qualify for this additional refundable credit. You must file and use new Schedule 8812, Child Tax Credit, to claim the credit. 

4. American Opportunity Credit.  If you or someone you support is a student, you might be eligible for this credit. Students in their first four years of post secondary education may qualify for as much as $2,500 through this partially refundable credit. Even those who owe no tax can get up to $1,000 of the credit as cash back for each eligible student. You must file Form 8863, Education Credits, and submit it with your tax return to claim the credit. 

5. Health Coverage Tax Credit.  If you’re receiving Trade Adjustment Assistance, Reemployment Trade Adjustment Assistance, Alternative Trade Adjustment Assistance or pension benefit payments from the Pension Benefit Guaranty Corporation, you may be eligible for a 2012 Health Coverage Tax Credit. Spouses and dependents may also be eligible. If you’re eligible, you can receive a 72.5 percent tax credit on payments you made for qualified health insurance premiums. 

Want more information about filing requirements and tax credits?  For no obligation free consultation contact us today!

ABA Tax Accounting

info@abataxaccounting.com

612-282-3200

866-936-0430 Toll Free

www.abataxaccounting.wordpress.com

www.abatax81.blogspot.com

http://www.abataxaccounting.com

Published in: on January 29, 2013 at 3:02 pm  Comments (1)  
Tags: , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , ,

Year-End Tax Planning For Individuals – Strategize Tuition Payments

Year-End Tax Planning For Individuals – Strategize Tuition Payments

Federal, State, Local and International Taxes – The American Opportunity Tax Credit, which offsets higher education expenses, is set to expire after 2012. It may be beneficial to pay 2013 tuition in 2012 to take full advantage of this tax credit, up to $2,500, before it expires. 

CALL US FIRST – This is just one of the year-end planning tax moves that could make a substantial difference in your tax bill for 2012. But the best advice we can give you is to give us a call. We’ll sit down with you, discuss your specific tax and financial needs, and develop a plan that works for your business.

ABA Tax Accounting

info@abataxaccounting.com

866-936-0430 Toll Free

http://www.abataxaccounting.com

www.abataxaccounting.wordpress.com

Published in: on November 19, 2012 at 1:24 pm  Comments (1)  
Tags: , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , ,

Tax Strategies for Individuals – The “Nanny Tax” Rules: What to Do If You Have Household Employees

Image

If you have a household employee, you may need to pay state and federal employment taxes. Which forms do you need to file for your household employees? Is your maid, housekeeper, or babysitter covered by the rules? Considering a Tax Professional? 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

Published in: on October 16, 2012 at 12:19 pm  Leave a Comment  
Tags: , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , ,
%d bloggers like this: