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Many of us engage in arts or crafts, but when do you have to start reporting your work as a business to IRS rather than a hobby?

The key feature that sets a business apart from a hobby is that a business is done in order to make a profit. The IRS will generally treat your activity as a business if you make a profit three out of the previous five years, and they will treat it like a hobby if you don’t.

Why is this important?

  • Both businesses and hobbies must report all income to IRS.
  • Starting in 2018, hobby expenses are no longer deductible.
  • Businesses have the advantage that they can deduct expenses.
  • If a business operates as a loss, you can deduct the loss.
  • Businesses have the advantage that they can claim the qualified business income deduction (or QBID), which will reduce taxable business income by 20% for most individuals.
  • Businesses have the drawback that they are subject to self-employment taxes and have to file Schedule C.

As you can see, businesses get some useful tax benefits that hobbies don’t. However, running a business comes with additional responsibilities, namely having to keep records to prove expenses and the requirement to complete additional tax forms. Also, if you continually run a business at a loss, you risk IRS categorizing that activity as a hobby and disallowing your expenses- That could sting at tax time.

Are you unsure whether your activity should be treated as a hobby or as a business? Do you need assistance reporting your business income or do you have questions about the qualified business income deduction? Clergy Financial Resources can help.

Visit our website at https://www.clergytaxnet.com/services/clergy-tax-preparation/ if you would like us to prepare your 1040 return or visit https://www.clergytaxnet.com/resources/proadvisor/ if you would like to hire us for a limited tax support session.

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Clergy Financial Resources serves as a resource for clients to help analyze the complexity of clergy tax law, church payroll & HR issues. Our professionals are committed to helping clients stay informed about tax news, developments and trends in various specialty areas.

This article is intended to provide readers with guidance in tax matters. The article does not constitute, and should not be treated as professional advice regarding the use of any particular tax technique. Every effort has been made to assure the accuracy of the information. Clergy Financial Resources and the author do not assume responsibility for any individual’s reliance upon the information provided in the article. Readers should independently verify all information before applying it to a particular fact situation, and should independently determine the impact of any particular tax planning technique. If you are seeking legal advice, you are encouraged to consult an attorney.

For more information or if you need additional assistance, please use the contact information below.

Clergy Financial Resources
11214 86th Avenue N.
Maple Grove, MN 55369

Tel: (763) 425-8778 
Fax: (888) 876-5101
Email: clientservices@clergyfinancial.com

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