See yesterday’s post about hobbies and their potential problems. Now how to turn you hobby into a business:1. Carry on the hobby in a business-like manner (you could have a separate checking account for your business, plus maybe register a dba and name your business.)2. You put time and energy into the business that shows you want to make it profitable.3. You need the money to live on (this by itself shows a for profit motive)4. Your losses are beyond your control or they are normal in startup phase of business (say the economy turned against you or you had computer problems).5. You or the advisors you use have the knowledge to carry on a successful business, It is just taking a little time.6. You have had some success in this activity before.The more of these items you do the better chance you have of having a business instead of a hobby. One more thing – The IRS looks for profit motive by seeing a profit in 3 out of 5 years, so it makes sense to have profitable years.
Brian’s Tax Musings
Sorry for no posts the last few days – was away doing some personal things and didn’t have time.Do you have a hobby that you receive money for but never make a profit (Avon, breeding animals, etc)? BEWARE! Under IRS regs any money you make on a hobby is taxable on the front of your return and any expenses you incurr are only deductible as miscellaneous itemized deductions, which are reduced by 2 percent of your income and can only be taken if you itemize, plus you can only deduct the same amount of expenses as the hobby income. This is a horrible situation – you are probably going to be paying tax on money you didn’t make.You have three choices:(1) Stop doing the hobby.(2) Turn it into a legitimate business so you can deduct all your expenses.(3) Continue the hobby but don’t receive any money for doing it so you dont have to claim it as income.(1) and (3) don’t need any explanation. Tomorrow I will talk a little about (2) and how to do it.
Brian’s Tax Musings
Some further discussions about hiring your kids in your business and using their earnings for college through a Roth of Traditional IRA:The IRA may be ignored in measuring parent and student resources for purposes of college financial aid.Monies in the IRA grow tax deferred.The IRA might eliminate some or all of the child’s income from the kiddie tax – child’s income taxed at the parents’ rates.The working child who earns more than the standard deduction benefits from both a tax deduciton for a contribution to a traditional IRA and that IRA’s inside buildup of tax-deferred savings.