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Hobby or business tax status? See why it matters...

December 27, 2018

Have you started a new business or hobby? If so, the tax difference between the two could turn out to be very important when it comes to your tax bill.

2018 tax law changes for hobbyists

If the IRS considers your new venture a business, you can generally deduct expenses and offset losses against other income. But if your venture is deemed a hobby, you can no longer deduct anything. While hobby losses were never deductible, hobbyists used to be able to deduct expenses as miscellaneous itemized deductions (exceeding 2 percent of adjusted gross income). This is no longer allowed under recent tax code changes that are set to last through 2025. 


So do you have a hobby or business?

With less-than-favorable hobby status tax treatment, now is a good time to determine if your activity truly is a hobby or a business. The IRS uses the following factors to determine whether you have a hobby or a business:

  • Activity is conducted in a businesslike manner

  • Necessary expertise to run the business

  • Amount of time and effort spent on the activity

  • Successful track record with other business ventures

  • Substantial income from other sources

  • Expectation that the business will be profitable or that its assets will appreciate over time

  • Losses in the activity continue beyond the normal time to bring the operation into profitable status

  • Occasional profits in relation to losses

  • Activity has personal pleasure or recreation elements

For tax help with your business or hobby, contact our office.

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