Eight important tax questions for hobbyists - WDAM - TV 7 - News, Weather and Sports

Eight important tax questions for hobbyists

Posted:
Does your hobby turn a profit? Then the IRS may consider it a business. (©iStockphoto.com/Gene Krebs) Does your hobby turn a profit? Then the IRS may consider it a business. (©iStockphoto.com/Gene Krebs)
  • Most ReadMost Popular StoriesMore>>

  • Mississippi unemployment highest in nation

    Mississippi unemployment highest in nation

    Wednesday, August 20 2014 5:43 PM EDT2014-08-20 21:43:48 GMT
    June 2014, Labor Market Information Dept.June 2014, Labor Market Information Dept.
    The most recent numbers have been released and once again, Mississippi's unemployment rate has ranked highest in the nation. The national average, according to the U.S. Labor Department, is 6.2%, whileMore >>
    The most recent numbers have been released and once again, Mississippi's unemployment rate has ranked highest in the nation. The national average, according to the U.S. Labor Department, is 6.2%, whileMore >>
  • Police still investigating whether Vicksburg incident was an abduction

    Police find 2-month-old child allegedly abducted in Vicksburg

    Wednesday, August 20 2014 1:52 PM EDT2014-08-20 17:52:07 GMT
    According to law enforcement sources, a 2-month-old baby in Vicksburg has been found, along with the man who is accused of abducting the child.  We are told that suspect kicked in the door at 400 BayouMore >>
    The mother of the child reported that her ex-boyfriend, Kevin Buck, entered her house and took the child without her permission.
    More >>
  • Tropical wave development possible, not likely

    Wednesday, August 20 2014 3:19 PM EDT2014-08-20 19:19:08 GMT
    There is currently a lot of misinformation (and fear) floating around the Internet about the development of a hurricane in the Atlantic Ocean threatening the Gulf Coast of the United States late next week.More >>
    There is currently a lot of misinformation (and fear) floating around the Internet about the development of a hurricane in the Atlantic Ocean threatening the Gulf Coast of the United States late next week.More >>

A tax tip from IRS.gov

Summer is a time many Americans take their fishing poles and gardening tools out of storage. Hobbies -- such as woodworking, stamp collecting and scrapbooking -- are often done for pleasure, but can result in a profit.

If your favorite activity does make a profit every year or so, there may be tax implications. You must report income to the IRS from almost all sources, including hobbies.

Here are eight questions that will help determine if your activity is a hobby or a business.

1. Is the purpose of your activity to make a profit? Generally, your activity is considered a business if it is carried on with the reasonable expectation of earning a profit.

2. Do you participate in your activity just for fun? Hobbies -- also called not-for-profit activities -- are those activities that are not pursued for profit.

3. Do you depend on income from the activity? If so, your activity is likely considered a business.

4. Have you changed methods of operation to improve profitability? If so, your hobby may actually be a business.

5. Do you have the knowledge needed to carry on the activity as a successful business? People who carry out hobbies just for fun, often don't have the business acumen to turn their not-for-profit activity into a profitable business venture.

6. Have you made a profit in similar activities in the past? This may indicate your activity is a business rather than a not-for-profit hobby. An activity is presumed carried on for profit if it makes a profit in at least three of the last five tax years, including the current year -- or at least two of the last seven years for activities that consist primarily of breeding, showing, training or racing horses.

7. Does the activity make a profit in some years? Even if your activity does not make a profit every year, it still may be considered a business.

8. Do you expect to make a profit in the future from the appreciation of assets used in the activity? This indicates your activity may be a business rather than a hobby.

If your activity is not carried on for profit, allowable deductions cannot exceed the gross receipts for the activity. If you are conducting a trade or business you may deduct your ordinary and necessary expenses.

More information about not-for-profit activities is available in Publication 535, Business Expenses, available on the IRS.gov Web site or by calling 800-TAX-FORM (800-829-3676).

Link: IRS Publication 535, Business Expenses 

Remember that all of the web page addresses for the official IRS website, IRS.gov, begin with http://www.irs.gov. Don' t be confused or misled by internet sites that end in .com, .net, .org or other designations instead of .gov. The address of the official IRS governmental Web site is http://www.irs.gov/.

INFORMATIONAL DISCLAIMER The information contained on or provided through this site is intended for general consumer understanding and education only and is not intended to be and is not a substitute for professional financial or accounting advice. Always seek the advice of your accountant or other qualified personal finance advisor for answers to any related questions you may have. Use of this site and any information contained on or provided through this site is at your own risk and any information contained on or provided through this site is provided on an "as is" basis without any representations or warranties.