Jul 17, 2023
When it comes to taxes, you know the rules we all have to follow are boundless. And when you have a business, go ahead and factor in twice the amount of rules that need to be tended to. With a business, the origination, focal point, execution, and monies earned and spent all factor into how it can be considered on your tax return IF it can be considered.
To begin, it is important to define the activities involved. A business will operate to turn a profit from the activity conducted, whereas a hobby is an activity one partakes in either recreational or as a sport without the intention of making a profit.
It is possible for an enterprise to begin as a business venture but later be designated by the IRS as a hobby. When the IRS classifies an activity as a hobby or business, they take into consideration several factors. The primary factors considered are:
When the IRS factors the answers to these questions, a determination is made regarding the activities being of a legitimate business or of a hobby. If the IRS determines the business activities claimed on your tax return are actually related to a hobby, all expenses claimed against any income earned will be discredited, typically causing a tax consequence to occur.
Deductions for a hobby must be claimed on Schedule A of Form 1040 as an itemized deduction. The IRS does have rules (go figure!) on how the deductions are taken and dictate a specific order, which is as follows:
When a taxpayer receives income from an activity performed without the intention of making a profit, in other words, a hobby, the income must be reported on Schedule 1 of Form 1040.
To determine if your activity is a hobby or business, or if you intend for it to remain a hobby and wish to ensure you are following IRS guidelines, it is always recommended to seek the advice of a professional. A tax professional will be able to walk you through the required guidelines to ensure you are not deducting incorrectly and all income is reported as required. The Golden Lion Tax Solutions team can serve as an excellent resource for you! Over the years, our team has helped thousands of clients resolve their tax account concerns, some of which have been due to the reclassification of a business to a hobby. We can help provide you guidance to ensure you are operating and reporting your business properly to avoid any classification switch, and have the knowledge and expertise to challenge any classification change posed by the IRS.
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Your future and your family deserve the right protection. Golden Lion Tax Solutions will be your advisor and confidant throughout the entire journey. We guarantee to offer you or your business best-case solutions for your tax debt. We are by your side every step of the way. Start now and get your life back.
For help with your tax debts, email email@example.com or call 833-LION-TAX (833-546-6829)
Disclaimer: There are requirements that must be satisfied in order to qualify for some of the tax solutions we discuss on our website. Not all of our services will be suitable for every client. Golden Lion Tax Solutions is here to help you find the most appropriate solution to fit your situation.