Remember whenever you’d be bored people would say, “oh find a hobby!”
If you are lucky enough to earn a steady income from your hobby, you must report that income earn to the IRS. There are a number of things to be considered when reporting it, but the first question you should ask yourself is: is this just a hobby or a business? The IRS defines a hobby as an activity you pursue, without expecting to make a taxable profit. But if you do the business with the expectation of making a profit, that’s a business.
The IRS has their own criteria of how to help you determine that:
• Whether you carry on the activity in a businesslike manner.
• Whether the time and effort you put into the activity indicate you intend to make it profitable.
• Whether you depend on income from the activity for your livelihood.
• Whether your losses are due to circumstances beyond your control (or are normal in the startup phase of your type of business).
• Whether you change your methods of operation in an attempt to improve profitability.
• Whether you or your advisors have the knowledge needed to carry on the activity as a successful business.
• Whether you were successful in making a profit in similar activities in the past.
• Whether the activity makes a profit in some years and how much profit it makes.
• Whether you can expect to make a future profit from the appreciation of the assets used in the activity.
It’s important to keep track of all your expenses, but you are only allowed to deduct up to the amount of money you have made on the hobby. Your hobby expenses, and any other expenses on Schedule A, must come to more than 2% of your adjust gross before you can deduct. If the money is coming in consistently, it would be less of a hassle, taxes wise, to turn your hobby into a business.
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