Reporting Income Earned From a Hobby
These are uncertain times and many people are attempting to make ends meet by earning side income. This does, however, often come with tax-related obligations, so if you need help determining whether you need to report income earned from a hobby or side job, you should speak with an experienced Florida tax and IRS attorney who can help you avoid late charges and other penalties for failing to report all of your income.
Reporting Hobby-Related Income
Many people enjoy hobbies like painting, sewing, and gardening. Some, however, are fortunate enough to not only engage in a hobby, but to earn extra money by doing so. Like income earned from a business, taxpayers are required to report what they earn from their hobbies to the IRS. They will, however, not be allowed to deduct losses incurred from engaging in the activity beyond the amount of income generated by the hobby. This means that taxpayers cannot deduct the cost of obtaining hobby-related equipment and supplies or paying educational fees if those costs exceed what they earn in sales. For this reason, determining whether an activity qualifies as a business or a hobby can have important consequences for taxpayers.
Are You Engaged in a Hobby or a Business?
Fortunately, the IRS has issued some guidance on this issue, stating that a hobby doesn’t become a business unless the activity is undertaken for a profit. Basically, as soon as a person takes steps to generate a profit, his or her hobby has technically become a business, meaning that he or she will be subject to additional tax rules. A few other factors that can help taxpayers determine whether their hobby will be tasked as a business, include:
- Whether the activity is carried out in a businesslike manner, with the taxpayer maintaining complete and accurate records;
- Whether the person depends on income from the activity;
- Whether the taxpayer changed the method of operation to improve profitability;
- Whether the taxpayer made a profit engaging in similar activities in the past; and
- Whether the taxpayer can expect to make a future profit from the appreciation of the assets used when engaging in the activity.
Remember, just because a hobby isn’t always treated by the IRS as a business doesn’t mean that a taxpayer is off the hook when it comes to reporting any income generated from that activity. For this reason, taxpayers engaged in hobbies from which they earn money should still keep detailed records of their transactions. These records will also be necessary if a taxpayer wants to deduct expenses related to the hobby, as it is necessary to itemize the costs to qualify for a deduction.
Contact an Experienced Florida Tax and IRS Attorney for Help
If you have questions about how to report any income earned from a business venture or hobby, please call dedicated tax attorney Ronald Cutler, P.A. to learn more about your obligations and how to avoid the accrual of penalties and fees. You can reach a member of our legal team to schedule a consultation by calling 386-490-9949 today or by completing one of our online contact forms.