Maybe you sell crafts at an Etsy shop or at a local flea market.
Or you shed toy trains on the weekends, making for some extra cash.
Whether you sell herbs grown in your garden or ornaments made from recycled materials, you don’t want to run away from the IRS.
The agency defines a hobby as “any activity that a person pursues because they enjoy it and not with the intention of making a profit.”
But many people have hobbies that eventually turn into an income source. Determining whether a hobby has developed into a business can be confusing, especially for tax purposes.
If your hobby is actually a business, you must declare income, but you will be able to deduct expenses on your tax return.
But you must also report income, even if you’ve never been interested in making a profit, the IRS said.
“If a taxpayer receives income from an activity that is performed with the intention of making a profit, they must report the income received on Schedule 1, Form 1040, line 8,” the IRS said.
Tax write-offs are a big issue.
The IRS wants to make sure that those who take the business deduction are actually running a business and not just trying to get reimbursed for a hobby.
Profit motive is something the agency will consider, it said. It is common for new businesses to lose money in the beginning, and they often have more deductible expenses than income. But if you try to deduct expenses for a hobby that isn’t meant to make a profit, the IRS will ask questions.
It seeks to see that the taxpayer “conducts the activity in a professional manner and maintains complete and accurate bookkeeping and records.”
It also seeks to see whether the taxpayer invests time and effort in the activity to show that they intend to make it profitable, and that they depend on the income from the activity for their livelihood.
So is it your business or hobby? If you’re not sure, meet with a qualified tax preparer.
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