Wednesday, May 6, 2020

Hobby or Business?


If you make money in any way outside of your “regular” job, the IRS probably knows about it. And, if it doesn’t, it wants to and eventually will. That’s because the IRS wants to tax every cent you make.

However, it’s important to understand that not all enterprises count as a “business” for IRS purposes. Some do and will allow you to take business deductions. Then, you have others that count merely as hobbies and don’t allow for deductions. Obviously, for tax purposes, it’s important to understand the difference.    


Is it a Hobby?
If you make money from a hobby, you have to report it to the IRS. However, whether you report it as a business or a hobby all comes down to expectation. If you expect to make money from your hobby, then it’s a business. If you’re just doing it for fun, however, and profit is just a “maybe” thing, it’s a hobby.
While classifying your extra or side work as a hobby may seem less intimidating come tax time, it actually doesn’t work in your favor. That’s because you can’t deduct any of the expenses related to it.
Is it a Business?
As mentioned, if you can reasonably expect to earn a profit from what you do, even if it’s “on the side,” you can count it as a business.
Of course, you should appear as operating a legitimate business to the IRS. This means keeping detailed financial records, ideally ones that are separate from your personal records, having verifiable skills or credentials that increase your likelihood of success in your chosen area, and depending, at least in part, on the income you make from your business for your survival.
Contact A Tax Professional
Whether you think you’re operating a business or just engaging in a hobby, you really should consult a tax professional for help.
If it’s a hobby, then you’re going to need to find other ways to lower your tax liability since you can’t take deductions.
And, if it’s a business, then you need to be able to take advantage of all of the legal deductions you can to save.
Either way, if you’re earning money from something outside of your regular 9 to 5, don’t handle your taxes on your own. It’s just not smart.

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