Blog Layout

Is Your Activity A Business or A Hobby?

nicholas • Aug 12, 2016

Earlier in the week, our Facebook account posted a really interesting article from Forbes about the Olympics and taxation. You can view that article here:  Facebook Article  . By the way, if you are not already following us on Facebook, please give us a “like”!

The article references how Olympic athletes are taxed and how it depends on if they treat their participation as a business or as a hobby. The IRS has strict rules to distinguish what is a hobby and what is a business. They regularly monitor Schedule C’s that are submitted to verify that they are indeed a business activity.

So, What Does The IRS Consider A Hobby Vs. A Business?

Per the IRS tax code, here are some things to consider when determining if you are participating in a business or a hobby:

  • 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?

As a rule of thumb, the IRS considers an activity is being 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.

What Is The Difference In Taxation Between A Business And A Hobby?

If you determine that your activity is a business, then you will report all of your income and expenses involved on the Schedule C. On the other hand, if your activity is considered a hobby, you will report your income as “Other Income” and your expenses will only be deductible along with your other itemized deductions on the Schedule A.

Business vs. Hobby is a section of the tax code that the IRS audits frequently, and for good reason. Incorrect deductions of hobby expenses account for a portion of the overstated adjustments, deductions, exemptions and credits that add up to $30 billion per year in unpaid taxes, according to IRS estimates.

We help business owners in Milwaukee, Waukesha, Brookfield, New Berlin, Wauwatosa with business tax return preparation and tax planning.

If you are currently doing any side projects, or are considering starting one up, please contact your tax guy at Hammernik & Associates to determine if it is a business or a hobby. Your tax planning strategy may depend on it!

 

Until next time,

Nicholas Hammernik, EA

See More Blog Posts

The COVID Relief Bill Summarized

By nicholas • 24 Dec, 2020
The “rescue package” has arrived. The COVID Relief bill is a whopping 5,593 pages long. I know you don’t want to sit and read through that novel, so I am here to summarize, in plain English, how this bill is going to effect your taxes. Have you ever been on a roller coaster before? A… The post The COVID Relief Bill Summarized appeared first on Talking Tax to Milwaukee.

The Tax Slang Movement

By nicholas • 04 Dec, 2020
This past week, I finally dove into a project that I has been brewing in my mind for a few years. I published my first podcast episode today. Is it any good? I’m not quite sure. To be honest, I’m not too happy with how it turned out. However, I accomplished part of my goal.… The post The Tax Slang Movement appeared first on Talking Tax to Milwaukee.

2020 Year-End Tax Savings Tips

By nicholas • 13 Nov, 2020
Your goal should be to get the IRS to owe you money. Of course, the IRS is not likely to cut you a check for this money (although in the right circumstances, that will happen), but you’ll realize the cash when you pay less in taxes.   Here are seven powerful business tax-deduction strategies that… The post 2020 Year-End Tax Savings Tips appeared first on Talking Tax to Milwaukee.

COVID-19 Tax Updates

By nicholas • 31 Jul, 2020
  With the 2019 Tax Filing Season just behind us, it is difficult to think of the next filing season, however, there are many issues that need to be addressed now, rather than wait. At this most difficult time for our taxpayers, we want to assure you that our firm is here to assist you… The post COVID-19 Tax Updates appeared first on Talking Tax to Milwaukee.

Milwaukee Restart Grant Program

By nicholas • 05 Jun, 2020
The goal of the Milwaukee Restart Program (Restart) is to help local businesses that suffered as a result of the pandemic to reopen and adapt to the “new normal” Eligibility Restart grants will assist for-profit businesses located in the City of Milwaukee that have 20 or fewer full-time or full-time equivalent employees and greater than $0 but less… The post Milwaukee Restart Grant Program appeared first on Talking Tax to Milwaukee.

Additional Grant Becomes Available For Wisconsin Small Businesses

By nicholas • 05 Jun, 2020
Over the past few months COVID-19 has changed the way a lot of small businesses operate. Some have been unable to be open, some have adapted and changed, and some have even thrived. The Government had made a few loans available to try and help small businesses keep their employees employed and to also cover… The post Additional Grant Becomes Available For Wisconsin Small Businesses appeared first on Talking Tax to Milwaukee.

Finding the Right Accountant to Successfully Guide You Through the Tax Maze

By nicholas • 14 Jun, 2019
Choosing an Accountant Who Puts Your Goals First There is an endless supply of do-it-yourself tax preparation tools and websites, and the sheer volume of options can lead you to believe the process of filing your returns is simple. However, a DIY approach only works if you are satisfied with paying more than necessary. Tax… The post Finding the Right Accountant to Successfully Guide You Through the Tax Maze appeared first on Talking Tax to Milwaukee.

Finding the right accountant to successfully guide you through the tax maze

By nicholas • 15 Feb, 2019
  Choosing an Accountant Who Puts Your Goals First There is an endless supply of do-it-yourself tax preparation tools and websites, and the sheer volume of options can lead you to believe the process of filing your returns is simple. However, a DIY approach only works if you are satisfied with paying more than necessary.… The post Finding the right accountant to successfully guide you through the tax maze appeared first on Talking Tax to Milwaukee.

Does my Rental Property Qualify for the New Section 199A Deduction Under Tax Reform?

By nicholas • 08 Feb, 2019
  How do you know if your rental property qualifies for the 20 percent tax deduction under new tax code Section 199A? Just what we need–something else to learn along with all of the other tax code changes this year. Well, maybe not. There is a piece of good news: we won’t be required to… The post Does my Rental Property Qualify for the New Section 199A Deduction Under Tax Reform? appeared first on Talking Tax to Milwaukee.

Do You Truly Know Your Business Costs? You Better!

By nicholas • 07 Dec, 2018
Your company’s profitability depends not only on sales, but also on effective cost management. Are you adequately addressing the cost side of the business equation? Analyze Your Cost Structure You probably can readily identify the products and/or services that are generating your greatest sales volume. But can you identify all the costs associated with providing… The post Do You Truly Know Your Business Costs? You Better! appeared first on Talking Tax to Milwaukee.
More Posts
Share by: