Archive for Taxes

Hobby or Small Business?

Filing folders and tabs to organize bills

Some of our hobbies are just that – something we do because we enjoy it & we all probably spend more money on the activity, whatever it is, than we’ve budgeted.

But when does a hobby become a business?

Hobby vs. Business

The key factor in answering the business vs. hobby question is whether or not you are doing it to make a profit.

If you are and if you do make a profit, guess what? That income is probably taxable business income.

At the same time, if you are making a profit on your “hobby”, that’s taxable income too. Surprised aren’t you?

So if income from both is taxable, why should you care which way it is classified?

Hobby vs. Business Taxation

From a taxation standpoint, there are some key differences:

• You can deduct business losses against other income, but not losses on hobbies.
• Hobby income is reported under “Other Income” on your personal Form 1040 tax return.
Hobby expenses are deducted on Schedule A, which means you have to itemize deductions in order to do so.
• Since hobby expenses are part of your Itemized Deductions, the expenses are subject to the deduction limitation that the expenses exceed 2% of your Adjusted Gross Income (AGI).
• Business expenses and income are reported on Schedule C, Profit or Loss from a Business. It doesn’t matter if you itemize your other deductions or not.
Hobby expenses are only deductible up to the amount of income you generate from it.
• To deduct hobby expenses, you need to pass the IRS litmus test that you are actually engaging in your hobby to make a profit.

IRS and the Hobby vs. Business Question

Here are some of the questions the IRS uses to decide if it is a business:
• Is your “hobby” carried on in a businesslike manner?
• Does the time and effort you put into the “hobby” show that your intention is to generate a profit?
• Do you depend on income from the “hobby” for your livelihood?
• Are your losses are due to circumstances beyond your control (or normal in the startup phase of your type of business)?
• Do you adjust your operations to improve profitability?
• Do you have the knowledge required to operate this “hobby” as a successful business?
• Have you been successful in making a profit in similar activities in the past?
Does the “hobby” make a profit in some years and how much profit does it make?
• Can you expect to profit from the future appreciation of the assets?

Still not sure?

If you want to delve into this more extensively, consult your financial advisor or check out the information in IRS Publication 535 “Business Expenses”.

Whatever the business vs. hobby determination for tax purposes, have some fun doing it.


Underwater Homeowner Tax Relief Update

home & tax illustrationMany of us who are in real estate thought it wouldn’t happen, but in a blow to homeowners who are working their way through short sales, Congress did not extend The Mortgage Debt Relief Act of 2007 beyond 2016.

It expired on December 31, 2016 and underwater homeowners lost a huge tax benefit to help them regain their financial footing.

Generally, the amount of any cancelled debt is taxable as ordinary income, including mortgage debt cancellation.So if you’re working on a real estate short sale, consider the income tax consequences.

Don’t Be Caught Short

With the expiration of this Act, homeowners are left out in the cold and left with a potentially with a big tax bill for short sales in 2017 and thereafter.

There may be an exception available to you if you signed the short sale deal in 2016, even if the transaction closes in 2017. But new short sales entered into in 2017 are no longer covered by the expired legislation.

Be sure to check with your accountant so that you know the tax consequences of any mortgage debt cancellation. Debt cancellation is taxed at the ordinary income tax rates, not the capital gains tax rates.


Get a Tax Deduction for Unreimbursed Employee Business Expenses

employee business expense tax deductionsPaying for business expenses or business related auto expenses out of your own pocket?

If your company does not or cannot reimburse the expenses, you might be able to use them as a personal tax deduction.

How to Claim Business Expenses

Unreimbursed business expenses can be claimed on Schedule A (Itemized Deductions) of your 1040 tax return.

If you don’t itemize your deductions or if your total itemized deductions do not exceed your Standard Deduction, there is effectively no tax deduction benefit to be gained from the expenses.

If you do itemize, then here’s the process:

  • Fill out Form 2106 or Form 2106EZ on which you will calculate your deductible amount for qualifying expenses
  • Take the amount on Form 2106 and list it on Schedule A in the appropriate place

What is a Qualifying Expense?

To be a deductible employee business expense, they must be:

Paid for or incurred in the tax year

• Be necessary and ordinary expenses in the course of your employment

• Related to performing your specific job or trade

Unreimbursed by your employer

What Types of Expenses are Deductible?

Necessary and ordinary expenses differ by trade or profession and can include, but are not limited to:

  • Licenses
  • Professional dues
  • Union dues
  • Uniforms
  • Tools
  • Vehicle expenses
  • Insurance premiums
  • Job related continuing education
  • Work related travel
  • Business use of your home

Are There Limitations?

Yes. Employee Business Expenses plus other Miscellaneous Expenses detailed on Schedule A must exceed 2% of Adjusted Gross Income (AGI) floor before being deductible.

If you have unreimbursed employee expenses, it is worth taking the time to do the calculation as it could lower your tax bill. If you don’t bother to do so, you’ll potentially be leaving money on the table.


Owe the IRS Money? Make Your Payment Directly on the IRS Website.

IRS Direct Pay optionNone of us like to find out we’ve come up short on our withholding or estimated taxes. That news delivered by your accountant or tax software can really ruin your day.

But if you have to send money to the IRS, you can pay up easily on the IRS website using Direct Pay.

And if you use the Direct Pay process to make a payment with a request for extension, you can automatically file your extension at the same time so you don’t have to file Form 4868 separately.

The Direct Pay process takes the money directly from your bank account, so you’ll need your routing number & account number to complete the process. It’ll give you an immediate confirmation for proof of payment as well.

There are no fees involved, unlike when you pay taxes with a credit or debit card using a 3rd party site.

Just as a warning – don’t wait until almost midnight to try it. The system does maintenance between 11:45pm and Midnight Eastern time.


Can’t get your taxes together by April 15th? File for an extension.

Tax filing extensionYou can apply for an automatic extension for filing your personal federal income taxes (Form 1040) by filling out Form 4868.

It’s simple & the 6 month extension is automatic. Here’s the big caveat, though. It is only an extension of time to file your tax return, NOT an extension of time to pay your taxes.

 This is an important distinction. If you don’t pay your full amount of tax, you’ll be liable for paying interest and penalties through the date that you do pay the tax bill in full.

Most states offer a similar extension option, but it is not automatic. You must file & ask for the state extension separately.

So if you don’t have a final answer about how much tax you owe, estimate it as closely as you can & send the payment with your extension to avoid any extra expense of penalty or interest.

You can get Form 4868 on the IRS website, & look for the state version on your state’s individual income tax information page.


Free Tax Filing

Tax Services Highway SignTax filing deadline stress is runs pretty high for many of us.

If your income is $64,000 or less, make it a little easier on yourself by using the IRS FreeFile website to file your federal 1040 return.

You’ll have a choice of online software programs provided by most of the major tax preparation companies.

The software will walk you through the tax return preparation process & allow you to file electronically, which will also cut the time until you receive your refund.

Not sure what information you’ll need? There’s a list of tax information on IRS website that will tell you what you need.


Do you Barter for services with other businesses? It may be taxable income.

barter taxationMany small business owners barter services or products with other businesses. It can be an effective economic “swap” without impacting cash flow.

But the transaction may have a taxable consequence. IRS regulations require both parties to the barter to acknowledge the fair market value of the exchange

Surprised? Most people are.

These tax rules have been in place for a long time but are often misunderstood.

If you are bartering through a Barter Exchange (businesses that formalize the transaction between parties), the exchange will report the barter value on Form 1099-B (Proceeds from Broker & Barter Exchange Transactions) for you.

Check out the rules to see if they apply to your business on the IRS website in the Bartering Tax Center.

Taxes aside, from a business planning perspective it’s important to track the value given & received in order to know how your business is doing.

If you were actually paying, or being paid for, the services/products you would easily know the true cost of running your business and be able to see an accurate bottom line. With unrecorded bartering transactions, true business performance may be obscured.


Avoid These 5 Common Tax Return Errors

common tax return mistakesThese are going to seem like very simple mistakes, but they are very common.

Considering everyone’s stress level around filing taxes and the last minute approach many of us take, it’s easy to make these mistakes.

Mistakes can delay your refund or cause other problems for you as the IRS tries to sort it out.

1. Errors with Social Security Numbers – sometimes they are missing; sometimes they are incorrect or incomplete; sometimes a claimed dependent’s number is missing. Whatever the case, make sure the tax return social security numbers match the number on each person’s social security card.

2. Misspellings or incorrect names – names should match social security records.

3. Miscalculation of Tax Credits such as the EITC (Earned Income tax Credit) – these various tax credits aren’t always simple to figure out, so check your calculation before filing.

4. Wrong Bank Account Numbers – if you want your refund to be directly deposited to your account (fastest way to receive your refund), double check the bank account number & routing information. You don’t want your refund to accidentally land in someone else’s bank account.

5. Bad Math – mistakes in basic math often happen, so check all your calculations.

Using the IRS free e-filing program (FreeFile) or tax software can help avoid some of these errors, such as the math or tax credit miscalculations.

Not leaving it to the last minute is also a good idea; that way you’ll have time to review your return and all your entries carefully.