Making our hobby our source of income can be the dream of many United States citizens. However, the IRS could put problems at the time of making the annual tax return in this regard. If the IRS decides that our work is a hobby, we may be in financial trouble.
Although it is difficult to get into such a situation, it is entirely possible. But it can be very disadvantageous to find that the IRS considers our work to be a hobby. Among other things, this can happen because our work does not bring us all the benefits we have in mind.
In theory, everything related to the job should give benefits in three of the last 5 years. Otherwise, the IRS could consider that this is not a job, but a hobby. In that case, the taxes would be very different, since we are not talking about something that can deduct anything at any time.
How does the IRS consider what is a hobby and what is work?
In order to consider what is a hobby and what is work, the IRS offers a series of official explanations through its website:
- The taxpayer carries out activity in a businesslike manner and maintains complete and accurate books and records.
- The taxpayer puts time and effort into the activity to show they intend to make it profitable.
- The taxpayer depends on income from the activity for their livelihood.
- The taxpayer has personal motives for carrying out the activity such as general enjoyment or relaxation.
- The taxpayer has enough income from other sources to fund the activity
- Losses are due to circumstances beyond the taxpayer’s control or are normal for the startup phase of their type of business.
- There is a change to methods of operation to improve profitability.
- Taxpayer and their advisor have the knowledge needed to carry out the activity as a successful business.
- The taxpayer was successful in making a profit in similar activities in the past.
- Activity makes a profit in some years and how much profit it makes.
- The taxpayer can expect to make a future profit from the appreciation of the assets used in the activity.
With these explanations we can be clear about what is a hobby and what is a job for the IRS. In short, what we must take into consideration is that a job must be profitable for it not to be considered a hobby. If this is not your case, you may have some problems in the future with the IRS and your tax return.
Avoid problems with your tax return
If you have a hobby that earns you some amount of money on a regular basis, you may have to file your taxes with the IRS. To some extent, we could be facing the opposite case of the previous one. If we manage to make the hobby the main source of income, we could declare it as our job.
If you have any doubts, you can turn to a specialist advisor for help. This way you will be able to avoid all kinds of problems with your IRS tax return. In addition, we can also benefit from our hobby, since it is possible that part of our expenses can be used as a tax-deductible item and thus not need to pay so many taxes.