Thanks to social media and sites like Etsy, many people have transformed one-time hobbies into profitable businesses. Maybe you have turned a baking passion, love for woodworking or knitting into a revenue stream? But how do you when you reach that point of distinction between hobby and business as it relates to your income tax reporting? To help you decide, the IRS provides tax tips to consider, along with guidance for hobby reporting.
First things first, if there is any question, taxpayers MUST report income earned from hobbies on their annual tax returns. The link above offers guidance for hobby filing. You can use this guide to help make the distinction between hobby and business activity. Here are the 9 steps the IRS asks you to consider:
- Whether you carry on the activity in a businesslike manner
- Whether the time and effort you put into the activity indicate you intend to make it profitable
- Whether you depend on income from the activity for your livelihood
- Whether your losses are due to circumstances beyond your control (or are normal in the startup phase of your type of business)
- Whether you change your methods of operation in an attempt to improve profitability
- Whether you or your advisors have the knowledge needed to carry on the activity as a successful business
- Whether you were successful in making a profit in similar activities in the past
- Whether the activity makes a profit in some years and how much profit it makes
- Whether you can expect to make a future profit from the appreciation of the assets used in the activity
Of course, no one point makes this distinction. You must look at the situation as a whole to make an accurate determination. That’s where we can help. We have the experience to accurately evaluate and make the distinction between hobby and business. From that point, we can also provide guidance on to best structure your accounting to support growth and tax filing guidance to ensure you take advantage of all deductions that may be available to you. To learn more, reach out to us at (913) 888-9100. Don’t wait until tax time. Getting the framework and structure in place ahead of time will make your filing much quicker come April!
