When Hobby Equals Business
Most people have some sort of hobby or special interest whether it is gardening, woodworking, model airplane flying, constructing model trains, coin collecting etc. And some people even make money with their hobbies. Is such income taxable? According to the Internal Revenue Code, yes it is. It does not matter if the income is small or large, regular or irregular, formal or informal. What matters is that you do make money out of your hobby. Here are some points to help you determine whether your hobby equates to a business.
Firstly, if your hobby is conducted merely for the fun of it and not for the purpose of making money then you would not take steps to generate income from your hobby (like charging people for some service or product connected to your hobby). But if you do make such steps, then your hobby may not be considered a hobby per se but a business.
Therefore, if you see the opportunity to make money out of your hobby and take steps to do so, then it becomes a business.
Secondly, if you rely in any way on the income you make out of your hobby, then your income is taxable. This is because your reliance on the income of your hobby would cause you to continue to generate that income, thus turning your hobby into a business.
Thirdly, if you have taken steps to make your hobby profitable, like buying necessary equipment, lowering operational costs or creating systems then you are treating your hobby like a business. In such a case, your profits are taxable income.
Fourthly, if your hobby has made you a profit in at least three of the last five years including the current year, it is classified a business. If your hobby is about activities related to breeding, showing, training or racing of race horses, it is considered a business if it makes a profit in at least two out of the last seven years.
Lastly, if you expect to make a profit by selling assets related to your hobby then it is taken to be a business.
If your hobby is a business, you are to file the necessary tax returns as you would a business. Then your business becomes entitled to the usual deductions such as for operational expenses. To find out more information on not-for-profit activities such as hobbies, check out Publication 535, Business expenses at www.irs.gov or call 1-800-TAX FORM (1-800-829-3676).
Darrin T. Mish is a veteran, nationally recognized tax attorney who has focused on providing IRS help to taxpayers for over a decade. He regularly travels the country training other attorneys, CPAs and enrolled agents on how to handle their toughest cases with the IRS. He is highly ranked among the top attorneys in the country, with an AV rating from Martindale-Hubbell and a perfect 10 on Avvo.com. Martindale-Hubbell has also honored him with a listing in their Bar Register of Preeminent Lawyers. He is a member of the American Society of IRS Problem Solvers and the Tax Freedom Institute. With clients on every continent but Antarctica, he has what it takes to solve your IRS problems no matter where you live in the world. If you would like more information about his practice and how he can help you, please call his office at (813) 229-7100 or toll free at 1-888-GET-MISH.
Related Posts
Filed under IRS Problems by 
Leave a Comment