Business or Hobby?

Credit Score Ingredients

When you incorrectly claim your favorite hobby as a business, it’s like waving a red flag that says “Audit Me!” to the IRS. However, there are tax benefits if you can correctly categorize your activity as a business.

Why does hobby versus business activity matter?

Chiefly, you’re allowed to reduce your taxable income by the amount of your qualified business expenses, even if your business activity results in a loss.

On the other hand, you cannot deduct losses from hobby activities. Hobby expenses are treated as miscellaneous itemized deductions and don’t reduce taxable income until they (and other miscellaneous expenses) surpass 2 percent of your adjusted gross income.

Here are some tips to determine whether you can define your activity as a business.

BUSINESS versus HOBBY
You have a reasonable expectation of making a profit. Profit Motive You may sell occasionally, but making money is not your main goal.
You invest significant personal time and effort. You depend on the resulting income. Effort and Income It’s something you do in your free time; you make the bulk of your money elsewhere.
Your expenses are ordinary and necessary to run your business. Reasonable Expenses Your expenses are driven by your personal preferences and not strictly necessary.
You have a track record in this industry, and/or a history of making profits. Background You don’t have professional training in the field and have rarely or never turned a profit.
You have multiple customers or professional clients. Customers You have few customers, mainly relatives and friends.
You keep professional records, including a separate checkbook and balance sheet; you have business cards, stationery and a branded business website. Professionalism You don’t keep strict professional records of your activities; you don’t have a formal business website or business cards.

The IRS will consider all these factors to make a broad determination whether you operate your activity in a businesslike manner. If you need help ensuring you meet these criteria, reach out to schedule an appointment.

 

Taxation Without Representation is Alive and Well

Taxation Without Representation is Alive and WellOur forefathers launched the Revolutionary War with the claim “taxation without representation.” What few of us realize is that taxing the other guy who has no say in the matter is now a prevalent technique. Here are some examples.

 Bullet Item 1 Hotel taxes to fund sports stadiums. New professional sports stadiums across the country are using hotel taxes to fund their construction. This tax is added to every visitors’ bill without input on whether they agree to the tax or not. In perhaps the most brazen example, supporters of a potential new NFL stadium referendum in San Diego are promoting getting fans from competing football teams to pay for their new stadium through hotel taxes.
Bullet Item 2 High property tax on vacation property. Own a cabin or other vacation property? The property tax you pay for this property is set by local officials. Temporary residents do not have a vote in electing these people. So out-of-town cabin owners end up footing the bill for local initiatives without a vote.

Bullet Item 3

Small business taxes. While the legal system treats corporations as legal entities, they have no voting rights. In addition, millions of small businesses are taxed on individual tax returns as flow-through entities, but the owners have no voting authority to represent their business if they do not live in the same community as their business. This means things like property taxes and sales taxes are set without representation.
Bullet Item 4 Out-of-state taxes despite no physical presence. Many states are taxing non-resident individuals and businesses with new legislation. For example, a consultant working for a California company may be subject to California income tax, even if residing and working in another state. Out-of-state businesses are challenged with newly defined “nexus” rules. As non-residents, these new taxpayers have no voice in the matter.

What’s the big deal?

Unfortunately, the pace of targeting taxes towards people and businesses with no voting rights is increasing. This is often due to legislatures taking the path of least resistance. Why not place the tax burden on someone who does not vote? Here are some suggestions on what you can do to manage this problem for you.

Bullet Item 1 Manage your stay. Know which cities have hotel taxes to support construction projects. Vote with your wallet by selecting your location for business and vacation stays. Sometimes the tax only applies to select counties around a stadium. This is the case with the tax to fund the construction of the Minnesota Twins baseball stadium. So select a nearby county that does not collect the tax.
Bullet Item 2 Shop wisely. When looking for a new vacation home or cottage, pay attention to the property tax. There are cases where two similarly valued properties on the same lake have different property taxes because the lake is in two different communities.
Bullet Item 3 Squeak. While you have no vote, you can still try to apply influence. If a community is not business-friendly in their tax proposals, getting the word out is often your only approach. Visit city council meetings and voice your concerns. Support local candidates that understand your plight. Consider challenging property valuations to minimize the impact of tax increases.

Every state, county, and community is different. Know the tax climate before you buy, move, or work in a community that is not your primary residence. It is often your only defense when you are subject to taxation without representation.

 

 

Déjà vù All Over Again

1040 and Gavel

Will the habit of late law changes continue?
The Congressional habit for repeatedly making late tax law changes is now so bad that the IRS is reserving blank lines on the form 1040 for possible law changes this month. Given the potential for retroactive tax law changes in 2015, please prepare for the extension of the following tax laws that expired in 2014. While there is no guarantee that tax law extensions will be made, by being prepared with the proper documentation you can take advantage of any forecasted changes.
Gavel Bullet Educator’s $250 tax deduction
If you are a teacher and have out-of-pocket expenses please keep your receipts. You may be able to deduct up to $250 of qualified expenses even if you do not itemize deductions.
Gavel Bullet State sales tax itemized deduction option
Keep receipts of any large purchases. The sales tax provision allows for you to take either a general sales tax deduction or a state income tax deduction as an itemized deduction.
Gavel Bullet Direct contribution from retirement accounts for qualified seniors
In 2014, qualified seniors who donated funds directly from their retirement plan could exclude the plan withdrawal from income. Hold off using this technique in 2015 until you receive confirmation from Congress this tax law is extended.
Gavel Bullet Itemized deduction for mortgage insurance premium costs
Keep your mortgage insurance documentation for a potential itemized deduction.
Gavel Bullet Changes in small business depreciation
Through late November, 2015 there is no longer bonus first year depreciation. In addition, Section 179 amounts are greatly reduced from $500,000 in qualified assets to $25,000. Even if the law changes, you have little time to purchase and install equipment. Please plan accordingly.
If other late law changes impact you, rest assured those changes will be applied to your tax return as they become known.