During the pandemic, many people found themselves confined to their homes. It is during this time that hobbies turned into a source of extra cash-on-the-side income. In some cases, it even became their only source of income. The ability to do what you love and make a profit is an ideal situation for most people.
However, as some may not be aware, that extra earned income must be reported on their tax return. Even if the individual does not own a business, or they are not a business set-up for profit, the IRS requires that ALL income received must be reported on tax returns. In determining whether your activity is a business or just a hobby, taxpayers should consider the following factors.
These factors are:
The activity is carried out in a businesslike manner and the taxpayer maintains complete and accurate books and records.
The time and effort the taxpayer puts into the activity show they intend to make it profitable.
You depend on income from the activity for your livelihood.
If losses are due to circumstances beyond the taxpayer's control or are normal for the startup phase of their type of business.
Creating methods of operation to improve profitability.
Having the knowledge needed to carry out the activity as a successful business.
If you are successful in making a profit in similar activities in the past.
If your activity makes a profit in some years and how much profit it makes.
If you expect to make a future profit from the appreciation of the assets used in the activity.
If a taxpayer receives income from an activity that is carried on with no intention of making a profit, they must report the income they receive on their schedule 1, Form 1040, line 8.
Cited resource from the IRS may be found on the IRS Website.
Strategic Financial Reporting Inc offers tax consultations and accounting services. Book your appointment today with one of our knowledgeable and high-quality accountants by clicking the following link: Book An Appointment.
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