Do you have a hobby or a business for profit (hustle)?
Posted 10.29.2020 in Taxes
How do you classify your business? Is it just a hobby? Or is it a business for profit? These are important questions with significant IRS implications. Keep in mind, your opinion does not matter – the IRS interprets your documents. When the IRS questions schedule C activities, they are looking at all of the nine issues below.
- Do you carry on the activity in a businesslike manner and maintain complete and accurate books and records?
- Do you put the time and effort you put into the activity indicate you intend to make it profitable?
- Do you depend on income from the activity for your livelihood?
- Are your losses due to circumstances beyond your control (or are normal in the startup phase of your type of business).
- Did you change your methods of operation in an attempt to improve profitability?
- Do you or your advisors have the knowledge needed to carry on the activity as a successful business?
- Have you had success in making a profit in similar activities in the past?
- Does the activity makes a profit in some years and how much profit does it make?
- Can you expect to make a future profit from the appreciation of the assets used in the activity?
Ask yourself these questions above and be honest with yourself. Clue: if your answer was “yes” to these questions, you likely have a business. If you answered ‘no’ to most of them, you likely have a hobby. The IRS’s determination of hobby versus business results in very different tax reporting including the types of deductions you are able to claim.
Interested in learning more? Have you received a related inquiry from the IRS? Do you have questions regarding how to report your business or hobby activities? Please contact Attaway Linville today at 803-831-0263 or 404-607-8400 to learn more about how we can help.