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Is it a Hobby or a Business?
Summer is a time many Americans take their fishing poles and gardening tools out of storage. Hobbies – such as woodworking, stamp collecting and scrapbooking – are often done for pleasure, but can result in a profit.
If your favorite activity does make a profit every year or so, there may be tax implications. You must report income to the IRS from almost all sources, including hobbies.
Here are eight questions that will help determine if your activity is a hobby or a business.
Is the purpose of your activity to make a profit? Generally, your activity is considered a business if it is carried on with the reasonable expectation of earning a profit.
Do you participate in your activity just for fun? Hobbies – also called not-for-profit activities – are those activities that are not pursued for profit.
Do you depend on income from the activity? If so, your activity is likely considered a business.
Have you changed methods of operation to improve profitability? If so, your hobby may actually be a business.
Do you have the knowledge needed to carry on the activity as a successful business? People who carry out hobbies just for fun, often don’t have the business acumen to turn their not-for-profit activity into a profitable business venture.
Have you made a profit in similar activities in the past? This may indicate your activity is a business rather than a not-for-profit hobby. An activity is presumed carried on 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.
Does the activity make a profit in some years? Even if your activity does not make a profit every year, it still may be considered a business.
Do you expect to make a profit in the future from the appreciation of assets used in the activity? This indicates your activity may be a business rather than a hobby.
If your activity is not carried on for profit, allowable deductions cannot exceed the gross receipts for the activity. If you are conducting a trade or business you may deduct your ordinary and necessary expenses.
More information about not-for-profit activities is available in Publication 535, Business Expenses, available on the IRS.gov Web site or by calling 800-TAX-FORM (800-829-3676).
Link: IRS Publication 535, Business Expenses
Wowser – A Tax Blog Throw Down – Why Keeping a Separate Business Checking Account Can Save Your Clients Money.
By Stacie Clifford Kitts, CPA
I must say, the business life of a tax accountant isn’t exactly a mardi gras. Moreover, it’s no wonder that we don’t see movies of the week about the accountant who couldn’t balance his or her ledger – borrrrring.
Therefore, I certainly look forward to the occasional lively debate, something stimulating and thought provoking, you know to spice it up a bit . But gees, I sure was stunned to read the comments made by June Walker over at her blog post There’s no shortage of bad advice out there. I suppose I don’t need to go into the details, since you can head over to her blog and read it yourself. But suffice it to say, she was a little miffed when a fellow blogger seamed to diss her blog post You Do Not Need A Business Checking Account.
But, hello, what do you expect to happen when you give that type of advice? Come on -you do not need a business checking account? What? Are you serious?
Regardless of all the important reasons to have a separate business account, you can check those out here at The Wondering Tax Pro’s blog, the extra cost that would be incurred by many clients to have an accountant or bookkeeper wade through business and personal expenses to pick out the proper deductions is not something I would readily advise to any client. And I know this from personal experience. Thank you.
I want my clients to focus on the important aspect of managing their businesses – you know – the revenue generating part, not the “Oh crap, I forgot to pull that business expense out of my co-mingled account” part.
So if you want to save your clients some frustration and some accounting fees, please advice them to open a separate banking account for their self-employed business.
In my opinion, advising a client NOT to open a separate business account would undoubtedly increase the accounting fees for those clients. So unless that is your intention, better stay away from that type of advice.
Stacie's Tax Stuff 