By Rosalyn Partin, Manchester H&R Block
With more time at home, many people have taken up hobbies such as crafting, photography, woodworking, etc. These hobbies may also be a source of income. Taxpayers who make money from a hobby must report that income on their tax return.
What is the difference between a hobby and a business? A business operates to make a profit whereas people engage in hobbies for recreation or sport and do not have a profit motive. Taxpayers should consider nine factors when determining whether their activity is a business or a hobby, and they should base their determination on all the facts and circumstances.
IRS considers these 9 factors when determining if an activity is a hobby or a business:
- Whether the activity is carried out in a businesslike manner and the taxpayer maintains complete and accurate books and records
- Whether the time and effort the taxpayer puts into the activity show they intend to make it profitable
- Whether they depend on income from the activity for their livelihood
- Whether any losses are due to circumstances beyond the taxpayer’s control or are normal for the startup phase of their type of business
- Whether they change methods of operation to improve profitability
- Whether the taxpayer and their advisors have the knowledge needed to carry out the activity as a successful business
- Whether the taxpayer was successful in making a profit in similar activities in the past
- Whether the activity makes a profit in some years and how much profit it makes
- Whether the taxpayers can expect to make a future profit from the appreciation of the assets used in the activity
Hobby income is reported as “Other Income” on the tax return. Expenses cannot be deducted from the income. The hobby income is subject to income tax but not to self-employment tax (Social Security and Medicare tax). Alternatively, business income of a sole proprietor is reported on Schedule C of the 1040 return. Business expenses can be deducted from the income before tax is calculated, and business losses can offset other income. Business income is subject to income tax and self-employment tax.
If you have questions about the tax impact of hobby income and would like help from the Tax Professionals at H&R Block, please call 931-728-9462. H&R Block has your back in Manchester!
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