Maybe you sell crafts at an Etsy shop or at a local flea market.
Or you restore model trains on weekends, which will earn you extra money.
Whether you’re selling herbs you grow in your garden or jewelry made from recycled materials, you don’t want to violate the IRS.
The agency defines a hobby as “any activity that a person pursues because they enjoy it and without the intention of making a profit from it.”
But many people have hobbies that they end up turning into a source of income. Determining whether a hobby has become a business can be confusing, especially for tax purposes.
If your hobby is really a business, you will have to declare the income, but you can deduct the expenses on your tax return.
But you also have to report the income even if you never intended the hobby to turn a profit, the IRS said.
“If a taxpayer derives income from an activity carried on without the intention of making a profit, he must declare the income he receives on Schedule 1, Form 1040, line 8“, said the IRS.
Tax deductions are a big problem.
The IRS wants to make sure those who take business deductions are really running a business and not just trying to get reimbursed for a hobby.
The profit motive is something the agency will consider, she said. It’s common for new businesses to lose money early on, and they often have more deductible expenses than income. But if you’re trying to deduct expenses for a hobby that isn’t intended to generate profits, the IRS will ask questions.
He will want to ensure that the taxpayer “conducts business in a professional manner and maintains complete and accurate books and records.”
He also wants to see the taxpayer put time and effort into the business to show that he intends to make it profitable and that he depends on the revenue from the business for his livelihood.
So is yours a business or a hobby? If you are unsure, meet with a qualified tax preparer.
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