Sign up for our FREE Monthly Email Newsletter
In addition to keeping in the financial know, you may be interested in checking your credit score and report.
¹The credit scores provided under the offers described here use the Equifax Credit Score, which is a proprietary credit model developed by Equifax. The Equifax Credit Score and 3-Bureau scores are each based on the Equifax Credit Score model, but calculated using the information in your Equifax, Experian and TransUnion credit files. The Equifax Credit Score is intended for your own educational use. It is also commercially available to third parties along with numerous other credit scores and models in the marketplace. Please keep in mind third parties are likely to use a different score when evaluating your creditworthiness. Also, third parties will take into consideration items other than your credit score or information found in your credit file, such as your income.
²The Automatic Fraud Alert feature is made available to consumers by Equifax Information Services LLC and fulfilled on its behalf by Equifax Consumer Services LLC.
³Equifax Credit Report Control™ is only available while you have a current subscription to Equifax Complete Premier. Locking your credit file with Equifax Credit Report Control will prevent access to your Equifax credit file by certain third parties, such as credit grantors or other companies and agencies. Credit Report Control will not prevent access to your credit file at any other credit reporting agency, and will not prevent access to your Equifax credit file by companies like Equifax Personal Solutions which provide you with access to your credit report or credit score or monitor your credit file; Federal, state and local government agencies; companies reviewing your application for employment; companies that have a current account or relationship with you, and collection agencies acting on behalf of those whom you owe; for fraud detection and prevention purposes; and companies that wish to make pre-approved offers of credit or insurance to you. To opt out of such pre-approved offers, visit www.optoutprescreen.com/.
4We will require you to provide your payment information when you sign up and we will immediately charge your card $4.95. After that, we will charge the card $19.95 for each month you continue your subscription. You may cancel at any time; however, we do not provide partial month refunds.
Equifax® is a registered trademark and Equifax Complete™ Premier is a trademark of Equifax, Inc. © 2014, Equifax Inc., Atlanta, Georgia. All rights reserved.
Over the years, I have regularly helped my clients with their tax audits after the IRS determined that their businesses were really hobbies. Filing taxes as a sole proprietor of a business means you can take advantage of tax deductions you may not have access to if your activity is a hobby, so it’s important to know the difference.
Distinguishing between a hobby and a business for tax purposes
One of the main factors the IRS uses to distinguish between a hobby and a business is the concept of a profit motive. In order for your activity to be considered a business, you must have the intention of turning a profit—either very soon or over time due to the long-term appreciation of your product or idea.
You can have a business without making an immediate profit
A woman designing and patenting space satellites would not turn a profit in the short term. Her legal and development costs would be high, and it could take a decade or more for her business to become profitable. But, in the end, even one sale could generate a profit of millions of dollars, which is likely the developer’s intent and the reason she is working on the project.
In this example, because there’s an intention to turn a profit after many years, this woman’s hobby would almost certainly be considered a business. Assuming this is the case, she could claim tax deductions for the activities related to her project.
Getting paid doesn’t guarantee your hobby is a business
Based on IRS criteria, certain activities may be considered hobbies even if the hobbyist gets paid. While he or she would still be required to report the income to the IRS, that person would be unable to take advantage of the same tax deductions from which a business owner can benefit.
Take, for example, my old friend Jack, a retired naval sergeant who made beautiful trophy cases. He polished the wood by hand and customized the compartments to fit the recipient’s items of pride. When he made a case for the family of a deceased soldier, he would take special care to create compartments for the flag that had covered the casket as well as any medals of honor, special pictures, and other personal items.
Jack’s trophy cases were highly sought after by veterans from all the armed services, and he made each one with love. He earned a bit of money from each one, but year after year he took took a loss of $5,000 or more on what he was calling a business.
Because Jack went years without making a profit and would not make a profit in the future from appreciation of his wares, he had to change his reporting from calling his work a business to calling it a hobby.
How do you report the financial aspects of a hobby properly?
Hobby-related expenses may only be deducted when you itemize. Report the income generated from your hobby as “other income” on line 21 of Form 1040, and itemize the deductions on Schedule A as “miscellaneous itemized deductions.”
The expenses have two limitations. You can only deduct the expenses from income that is generated from the hobby, and these expenses are reduced by 2 percent of your adjusted gross income (the amount in line 37 on Form 1040).
This means if you make $50,000 per year, you would not be able to deduct your first $1,000 of expenses.
If you don’t itemize, you may find yourself reporting the income and getting no benefit from the expenses. But when you’re doing something you love, who cares if you get tax benefits?
Eva Rosenberg, EA is the publisher of TaxMama.com, where your tax questions are answered. She is the author of several books and ebooks, including Small Business Taxes Made Easy. Eva teaches a tax pro course at IRSExams.com and tax courses you might enjoy at http://www.cpelink.com/teamtaxmama.
Equifax maintains this interactive forum for education and information purposes in order to allow individuals to share their relevant knowledge and opinions with other members and visitors. We encourage you to participate in discussions about personal finance issues and other topics of interest to this community, but please read our commenting guidelines first. Equifax reserves the right to monitor postings to the forum and comments will be published at our discretion. Do you have questions or comments about your Equifax credit report or customer-service issues regarding an Equifax product? If so, please contact Equifax directly. All opinions and information expressed or shared in blog comments are solely those of the person submitting the comments, and don't necessarily represent the views of Equifax or its management.