Now how many folks, who are spending more time in their business than they ever would just being somebody else’s employee, would call that business “just a hobby?”
Well the IRS just might want to call your business a “hobby.” Why would they do that? Simple, by doing so, it disqualifies ALL related expenses and only the GROSS income is taxed.
If you had a business with $100,000 of GROSS income and $110,000 of expenses, you don’t normally owe any tax for that business activity. In fact you get to write off the excess $10,000 of expenses against other income (like wages?).
If the IRS came swooping in and said, “Sorry! We don’t’ think you are operating a ‘business’ so we are reclassifying it as a ‘hobby’ and disallowing all related expenses.” Now you have to pay tax on the GROSS income of $100,000 (at 25% would be a tax of $25,000). Get this. You lost money, but you have to pay $25,000 in tax to the IRS.
How do you avoid this terrible action by the IRS?
The key fact to remember is that the IRS only comes in to reclassify a business as a hobby if you are showing a loss on the tax return. So, given that your real goal in having any business, is to make a profit, just make that happen as soon as possible.
Did you hear? Prov 14:23 says, “In all labor there is profit, but idle chatter leads only to poverty.”
Kelly Bullis is a Certified Public Accountant in Carson City. Contact him at 882-4459. On the web at BullisAndCo.com Also on Facebook.
-->Now how many folks, who are spending more time in their business than they ever would just being somebody else’s employee, would call that business “just a hobby?”
Well the IRS just might want to call your business a “hobby.” Why would they do that? Simple, by doing so, it disqualifies ALL related expenses and only the GROSS income is taxed.
If you had a business with $100,000 of GROSS income and $110,000 of expenses, you don’t normally owe any tax for that business activity. In fact you get to write off the excess $10,000 of expenses against other income (like wages?).
If the IRS came swooping in and said, “Sorry! We don’t’ think you are operating a ‘business’ so we are reclassifying it as a ‘hobby’ and disallowing all related expenses.” Now you have to pay tax on the GROSS income of $100,000 (at 25% would be a tax of $25,000). Get this. You lost money, but you have to pay $25,000 in tax to the IRS.
How do you avoid this terrible action by the IRS?
The key fact to remember is that the IRS only comes in to reclassify a business as a hobby if you are showing a loss on the tax return. So, given that your real goal in having any business, is to make a profit, just make that happen as soon as possible.
Did you hear? Prov 14:23 says, “In all labor there is profit, but idle chatter leads only to poverty.”
Kelly Bullis is a Certified Public Accountant in Carson City. Contact him at 882-4459. On the web at BullisAndCo.com Also on Facebook.
Comments
Use the comment form below to begin a discussion about this content.
Sign in to comment