An avid photographer occasionally does wedding photography or sells some shots to the local paper. A stay-at-home parent with a passion for baking takes orders for birthday cakes or desserts for parties. Or someone who’s great with crafts sells some of her creations online. Are they involved in a hobby or a business? Determining which can be a challenge for taxpayers. There are special IRS rules to answer the question, notes the Pennsylvania Institute of Certified Public Accountants, and you may be surprised by what they mean to you. Here is some information you need to understand where you stand and how it may affect your tax situation.
What Is a Business?
Both hobby and business income is generally taxable. If your activities can be considered a business, then you can deduct the qualified expenses involved, even if they exceed the income that the business brings in. However, a key feature of a business is that it is undertaken to earn a profit. In the eyes of the IRS, an activity is presumed to be carried on for a profit if it has made a profit in at least three of the past five tax years, including the current year. (There’s a slightly longer horizon for businesses that involve breeding, showing, training, or racing horses.) If you haven’t had three years or more of profits, the IRS may take nine other factors into account:
About Post Author
