Do you enjoy collecting and selling stamps, or coins, or anything of value? If so, is your activity a Business or Hobby? The IRS asks this same question all the time.If your business is deemed a hobby, you won’t be able to take a business loss.This also means that while you’re required to report as income all of your hobby receipts, you probably will not be permitted to deduct 100% of your expenses associated with the hobby.
According to the government, having a “business” means your primary motivation is to generate profits. If you are engaged in a “hobby”, the government believes your primary purpose is to have fun, not make money.
Based on the foregoing assertion the IRS has established (9) nine criteria for determining whether or not you have a profit motive.Those factors include such things as the manner in which the taxpayer carried on the activity; the time and effort spent by the taxpayer engaged in the activity; the expertise of the taxpayer; the expectation that the assets used in the activity would appreciate in value (demonstrating a “profit motive”); and the success of the taxpayer in other activities (i.e. you were previously successful in similar type business).Other criteria include the history of income or losses (continual losses could indicate a hobby); and the amount of any earned profits (if small, it is more indicative of a hobby) and the financial status of the taxpayer.
The determination of whether your activity is a business or a hobby can ultimately affect the amount of your tax liability.Wage garnishments to collect back taxes, IRS liens, and IRS levies are all mechanisms which may be employed by the IRS in its efforts to get back taxes from “income” generated by a business which was improperly categorized as a hobby.Of course, the taxpayer may object to the IRS’ position, but without the assistance of a competent IRS Tax Lawyer, your ability to successfully convince the IRS of your position may be compromised and you could end-up owing back taxes.
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