Another hobby or business: how does this affect the amount of tax?

When does your hobby become a business? The answer to this question is very important, because it determines whether you can reduce your taxable income by the amount of the cost of your business. This information is only relevant to Sole Proprietors, i.e. if you run your business without registering a legal entity.

Фото: Depositphotos

Your hobby becomes a business when you do your business for profit, and not the realization of your creative plans. To determine whether your business is a real business, not a hobby, the legislator has established the following criteria:

1. Your business should be organized as a business.. Those. you must demonstrate that you have done everything to organize exactly a profit-driven business: you keep accounts, have a business plan, etc.

2. The level of your understanding of your business. The ability to do something with your hands is a good start, but you need to know what you are doing and demonstrate this knowledge.

3. The amount of effort and time you spend on your business. If you do your own business from time to time and, for example, do not support permanent production and the store, then, most likely, this is a hobby.

4. Have you been successful in business before. Those. if you practice regular losses and closing a business, then most likely your business will not be regarded as a business.

5. Were three of the five years of business profitable. It is a key indicator. In fact, if you can’t demonstrate profitability for three years in the last five years of doing business, then you’re busy with a hobby.

6. Are your losses directly related to the conduct of your business.

7. Does your standard of living depend on your business?. If you have other sources of income and they significantly determine your standard of living, then most likely your business is a hobby.

8. Do you do business for your own pleasure. Perhaps the most controversial issue, but the IRS takes it seriously.

So, if you are busy with a hobby, then you have a chance to write off your costs, however, within the limits of the income received from the hobby. Costs are written off in the following sequence:

1. Expenses that are usually taken into account without taking into account the nature of the case: real estate taxes and mortgage interest.

2. Costs, which are usually taken into account if your hobby was a business. Example: utility costs, office maintenance costs and consumables.

3. Amortization on the used tools.

The last two items are deducted from AGI (Adjusted Gross Income) as itemized deductions, but within 2% of AGI. If you use standart deductions, unfortunately, you do not have any benefit from using the opportunity to take into account your hobby costs.

You should also remember that in the United States, any income is subject to taxation, even from criminal activities (the famous Al Capone case). For example, if your sales on Etsey are lower than $ 20K and you do not receive the 1099-K form, by law, any of your income should be reflected on the 1 page of your 1040 form.

Useful links:

• Section 1.183-2 - Activity.
• 1.183-1 - Activities not engaged in for profit.

This material does not constitute written tax advice or legal advice. Any information from this material is not created for use by the taxpayer in order to avoid any sanctions imposed on the taxpayer, and also can not be the basis for consultation by third parties. Please always consult a professional service before taking any action based on the information from this material. Keep in mind that information may be outdated at the time of reading, and we do not undertake to guarantee the updating of information. Copyright www.Solven.pro. Xnumx

Original article published on the site Solven.pro.

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