What's in a word? A world of tax consequences when the word is "business" or "hobby."
In a nutshell: If you and the IRS determine that an activity is a business, you'll owe taxes on profits and will be allowed to deduct expenses for conducting that business. But if your passion for, say, making quilts is a "hobby," you cannot deduct the fabric, thread, needles and labor needed to make the bedclothes.
Is your time-sapper really a business? Consider these criteria, and don't try to blur the business-hobby lines, which could red-flag your return and trigger an audit.
Even with the above guidelines, the line between a hobby and a business isn't always clear. The IRS may look at certain factors, such as, but not limited to, the following:
Of course, an activity can be a hobby and still produce income, and you can deduct hobby expenses to a certain extent. If your activity is a hobby, however, you cannot use losses to offset other income.
The differences between a hobby and a business can be subtle, so be sure to give us a call before drawing conclusions about whether your particular activity is a hobby or a business.
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