Does the IRS Treat Makers Unfairly? Distinguishing between a Business or Hobby

Taxpayers can only deduct hobby expenses up to the amount of hobby income. 

If hobby expenses are more than its income, taxpayers have a loss from the activity. 

A hobby loss can’t be deducted from other income.

Nine Fabled Factors 

1. Whether you carry on the activity in a businesslike manner and maintain complete and accurate books and records.

2. Whether the time and effort you put into the activity indicate you intend to make it profitable.

3. Whether you depend on income from the activity for your livelihood.

4. Whether your losses are due to circumstances beyond your control (or are normal in the startup phase of your type of business).

5. Whether you change your methods of operation in an attempt to improve profitability.

6. Whether you or your advisors have the knowledge needed to carry on the activity as a successful business.

7. Whether you were successful in making a profit in similar activities in the past.

8. Whether the activity makes a profit in some years and how much profit it makes.

9. Whether you can expect to make a future profit from the appreciation of the assets used in the activity.

WARNING: IRS Auditors and Examiners play fast and loose with the rules. If you’re a maker and are being audited, contact Selig & Associates for a free legally privileged consultation. 

IRS Small Business Week Tax Tip 2017-04, May 3, 2017

Millions of people enjoy hobbies that are also a source of income. From catering to cupcake baking, crafting homemade jewelry to glass blowing -- no matter what a person’s passion, the Internal Revenue Service offers some tips on hobbies.

Taxpayers must report on their tax return the income earned from hobbies. The rules for how to report the income and expenses depend on whether the activity is a hobby or a business. There are special rules and limits for deductions taxpayers can claim for hobbies. Here are five tax tips to consider:

1. Is it a Business or a Hobby?  A key feature of a business is that people do it to make a profit. People engage in a hobby for sport or recreation, not to make a profit. For more about ‘not-for-profit’ rules, see Publication 535, Business Expenses.
2. Allowable Hobby Deductions.  Within certain limits, taxpayers can usually deduct ordinary and necessary hobby expenses. An ordinary expense is one that is common and accepted for the activity. A necessary expense is one that is appropriate for the activity.
3. Limits on Hobby Expenses.  Generally, taxpayers can only deduct hobby expenses up to the amount of hobby income. If hobby expenses are more than its income, taxpayers have a loss from the activity. However, a hobby loss can’t be deducted from other income.
4. How to Deduct Hobby Expenses.  Taxpayers must itemize deductions on their tax return to deduct hobby expenses. Expenses may fall into three types of deductions, and special rules apply to each type. See Publication 535 for the rules about how to claim them on Schedule A, Itemized Deductions.

The True Tax Consequences Associated with Giving Employees Gift Cards, by David Selig, Selig & Associates

• Gift cards redeemable for cash are taxable to the employee. And contrary to some bad information that’s been floating around the Internet, there is no “holiday gift exemption”.
• Monetary prizes, including achievement awards, as well as non-monetary bonuses like vacation trips awarded for exceeding sales goals, are taxable compensation, and not just for income taxes, but for FICA, so withholding taxes apply. 

• Gifts worth more than $75 are taxable to the employee recipient.  Specifically, non-cash employee gifts of minimal value (under $75 per year), are not taxable.

• Any item that could be considered either a gift or as entertainment is generally considered entertainment and cannot be deducted.
• You need to have records that prove the business purpose of the gift as well as the details of the amount spent.

• The tax-free value is limited to $1,600 for all awards to one employee in per year. Gifts awarded for length of service or safety achievement are not taxable, provided they are not cash, gift certificates or points redeemable for merchandise

But what about my customers?Are business gifts deductible?Answer:  If you give business gifts in the course of your trade or business, you can deduct all or part of the costs subject to the following limitations:

• You deduct no more than $25 of the cost of business gifts you give directly or indirectly to each person during your tax year.
• If you and your spouse both give gifts to the same person, both of you are treated as one taxpayer.
• Incidental costs such as engraving, packing or shipping aren't included in the $25 limit if they don't add substantial value to the gift.
• For purposes of the $25 per person limit, don't consider gifts costing $4.00 or less that have your business name permanently engraved on the item and which you distribute on a regular basis.

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