Discussion:Activity / Hobby Question
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| 13 December 2005 | |
Terry is a practicing attorney who decides to become an agent for musical groups on the side. Terry engages in the activity and has the following revenue and expenses.
a) What are four of the factors the IRS will consider when evaluating whether her activity is a hobby?
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| 14 December 2005 | |
| HARD TO SAY --- IT DEPENDS ON FACTS AND CIRCUNSTANCES:
Lets see what Laseer's book says about that: You are PRESUME to be engaged in an activity for profit if you can show a profit in at least 3 of the last 5 years, including the current year. You can ,ALSO, prove a profit motive by showing these facts: You spent considerable time in the activity; you keep business like records; you relied on expert advice; you expect the assets to appreciate in value; and losses are common in the start-up phase of your type of business. To be or not to be, That is the question: Is there a "profit presumption? IF YOU THINK THAT THE ANSWER IS YES. GO AHEAD: According with the numbers: Income: $500 minus $12 000 losses = $11,500. (The video and TV equipment need to be added as depreciation) Best case scenario: The return is okey - No IRS's involving. Then, client need to be ready to get right answers in case of auditng-- OR -Worst case scenario: be ready for pay the price: An agent may disallow expenses and client would face taxes , penalties and intereses Question b: If the activity is a hobby. Then, in this case, no expenses may be deducted. (client is facing a loss) As soon as client is facing a profit-If the activity is dfeemed to be a hobby, He/She will need to pay taxes in the profit. | |
| 14 December 2005 | |
| Sorry.I forgot a rule: Only 50% of Meals and Entertaintment is deductible.
And remember, just "ordinary and necessary" business expenses. Orlando | |
| 14 December 2005 | |
| NO Schedulle A is needed. Then, 2 % of AGI limitation does not apply | |
| 15 December 2005 | |
| Again: If a "hobbie" . As soon as your client is loosing money: $11 500
there is not need to report anything. Logic behind: He is doing that for pleasure, and he cannot get any deduction on that activity. If a business: File Schedulle C showing (11 500) . Other history if he get a profit: Profit need to be added as income and He can get a deduction on expenses- ...See Pub. 535 for details | |
| 23 January 2006 | |
| If the income is deemed a hobby, your client can deduct expenses in the amount of his income. In this case, $500 of expenses can be deducted. The net result is zero tax liability or benefit, but to be within the letter of the law it must be reported. | |
| 23 January 2006 | |
| Question for Captcook:
You are right althought I don't expect anything bad from a zero tax liability. I think is weird to report something that does not bring any tax liability. Schedulle C???? | |
| 23 January 2006 | |
| In response to Martineo, the thought behind reporting hobby income is similar to reporting gambling income. You can deduct to the extent of your income (winnings). However, hobby deductions must go on SchA not SchC. In researching this further, I found it won't always result in zero tax liability. If your client, doesn't itemize, doesn't have any other misc deductions (2% floor) or is subject to the SchA phaseout because of high income then a tax liability may result from reporting this correctly. | |
| 24 January 2006 | |
| Sorry. Hobbies- Let's say the activity is a hobby
I understand about the tax liability in case the activity shows a profit. In case He/She is loosing money. The income to be reported , Is not negative? We are talking to report Income after expenses, I guess... Then, if the answer is right: In your last answer: Zero income, Zero deductions. No tax liability. Thank you, Orlando | |
| 24 January 2006 | |
| I'm sorry, I guess I wasn't very clear. It doesn't matter if there is a profit or not. Income is income and again "to be within the letter of the law" it must be reported. Zero income is not the same as zero profit. Let's use the numbers from the fact set above and make a few assumptions. A single taxpayer has hobby income of $500 and related expenses of $12000. Taxpayer has no other itemized deductions and other income of $20,000. The $500 allowable deduction for hobby expenses (up to the amount of income) is not available because it is not advantageous for the taxpayer to itemize. Therefore, given a 15% tax bracket $75 of tax liability results from the income. Try the same thing with a taxpayer that makes over the itemized phaseout threshold and a little more income. | |
| 24 January 2006 | |
| I was thinking Net Income = Profit
Your have a degree in acconting. Then, you are right, although it looks to me unfair to penalize hobbies in the same way that gambling is penalized Thank you again. Orlando | |
Arman barsamian (talk|edits) said: | 20 March 2007 |
| Feedback on this topic would be appreciated:
Say you want an activity to be considered hobby. You make perhaps $1,000-$3,000 per year on it at any time. Do you think that the IRC 183 rules and regulations issued under its authority (ie the 9 factors) can be used as your defense to claiming its a hobby? I think the answer is transparently "yes". However, on another board (MSN Money board) they branded me an illegal tax protestor for suggesting that. And for saying that if I'm wrong...So if they're correct, then only the government can use all 9 factors to evaluate your activity, but once you make a profit, that one factor is more powerful then all the others. | |
| 20 March 2007 | |
| Not sure what you are trying to accomplish here. If you generate income on anything, it is taxable. The hobby loss rules serve to limit your deductions in an activity that is a hobby and is generating losses. Again, a hobby generating income is taxable. Hobby as defined by you may be quite different from the government's defn of hobby. | |
Arman barsamian (talk|edits) said: | 20 March 2007 |
| IRC 183 gives either party taxpayer or IRS rebuttal advantage. The party that is then required to prove the activity is for profit or for hobby should then give evidence per Treasury Regs (ie the 9 factors).
The 9 factors would apply to the government or taxpayer no matter who had to prove the contention it is for profit or hobby. Am I correct with the 9 factor idea as stated in the Regs related to IRC 183? I mean they ought to apply equally to the government and the taxpayer and in both cases (where the taxpayer wants it to be a hobby or a business...) The income generated is taxable: that is not the issue at hand. SECA coverage would apply only to an activity that is a "business or for profit" under IRC 183, but not for a hobby. SECA is the issue. | |
Arman barsamian (talk|edits) said: | 20 March 2007 |
| Thanks for trying though, Jennifer. | |
| 20 March 2007 | |
| Discussion:Taxpayer defends hobby position | |
| 23 March 2008 | |
| New question - client receives 1099 for driving. Problem is, all trips are 1-way and as such he cannot make any money. The caluclation is impossible, there is no way to profit unless you drive in excess of the allowable hours & take return trips. Further he does it just to see the country. He is basically retired. Initially he thought it would be a good way to both see the country & make money & sometimes he did get return trips. This is the third year of driving & as such will be the third year of losses if on a schedule C. Based on this and his reduced driving for 2007- I believe its a hobby. Thoughts? | |
| 23 March 2008 | |
| Its a hobby since he is not attempting to make a profit or likely will have zero profit. | |
