Business or Hobby? Answer Has Implications for Deductions


FS-2007-18, April 2007

The Internal Revenue Service reminds taxpayers to follow appropriate guidelines when determining whether an activity is a business or a hobby, an activity not engaged in for profit.

In order to educate taxpayers regarding their filing obligations, this fact sheet, the eleventh in a series, explains the rules for determining if an activity qualifies as a business and what limitations apply if the activity is not a business. Incorrect deduction of hobby expenses account for a portion of the overstated adjustments, deductions, exemptions and credits that add up to $30 billion per year in unpaid taxes, according to IRS estimates.

In general, taxpayers may deduct ordinary and necessary expenses for conducting a trade or business. An ordinary expense is an expense that is common and accepted in the taxpayer’s trade or business. A necessary expense is one that is appropriate for the business. Generally, an activity qualifies as a business if it is carried on with the reasonable expectation of earning a profit.

In order to make this determination, taxpayers should consider the following factors:

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Does the time and effort put into the activity indicate an intention to make a profit?
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Does the taxpayer depend on income from the activity?
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If there are losses, are they due to circumstances beyond the taxpayer’s control or did they occur in the start-up phase of the business?
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Has the taxpayer changed methods of operation to improve profitability?
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Does the taxpayer or his/her advisors have the knowledge needed to carry on the activity as a successful business?
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Has the taxpayer made a profit in similar activities in the past?
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Does the activity make a profit in some years?
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Can the taxpayer expect to make a profit in the future from the appreciation of assets used in the activity?

The IRS presumes that an activity is carried on for profit if it makes a profit during at least three of the last five tax years, including the current year — at least two of the last seven years for activities that consist primarily of breeding, showing, training or racing horses.

If an activity is not for profit, losses from that activity may not be used to offset other income. An activity produces a loss when related expenses exceed income. The limit on not-for-profit losses applies to individuals, partnerships, estates, trusts, and S corporations. It does not apply to corporations other than S corporations.

Deductions for hobby activities are claimed as itemized deductions on Schedule A (Form 1040). These deductions must be taken in the following order and only to the extent stated in each of three categories:

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Deductions that a taxpayer may take for personal as well as business activities, such as home mortgage interest and taxes, may be taken in full.
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Deductions that don’t result in an adjustment to basis, such as advertising, insurance premiums and wages, may be taken next, to the extent gross income for the activity is more than the deductions from the first category.
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Business deductions that reduce the basis of property, such as depreciation and amortization, are taken last, but only to the extent gross income for the activity is more than the deductions taken in the first two categories.

Business Audits why are they so expensive?

The real answer is business owners put them off until the last minute and are not properly organized. Business owners need to prepare for the business audit in advance and need to meet with a qualified CPA to discuss what will be needed for the audit. Accounts and CPA's bill hourly for time and paying a fee in excess of a $100.00 per hour to locate documents in your office is a waste of money and added audit expense. I always put together a strategy to let clients know what is expected and to make sure I only bill for things that the business is capable of preforming. If you are looking for a new accountant to handle a business audit look early and ask for references. Judy Driscoll CPA specializes in Audits allowing for a faster and smoother experience for your business. If you are considered you are paying to much for your business audit please call me today to get a free opinion on your current audit process and fee schedule.

Thanks for reading.

Extensions for Individuals

If you are not able to file your federal individual income tax return by the due date, you may be able to get an automatic 6-month extension of time to file. To do so, you must file Form 4868, Application for Automatic Extension of Time To File U.S. Individual Income Tax Return by the due date for filing your calendar year return (usually April 15) or fiscal year return. This form is also available en español.

If your a business and you failed to file by March 15th your taxes are now late.

One of my client just had the below article posted in the startup gazette. I wanted to share with everyone. They help business get registered to do business with the federal government. US Federal Contractor Registration

As interest in government contracting grows, private companies such as US Federal Contractor Registration are helping businesses grow through working with the Federal government.

Following the American Recovery and Reinvestment Act, there has been a surge of interest in government contracting among business owners. While money has been set aside to fund upcoming contracts, working with the government is not quite as simple as calling yourself a vendor. The Federal Government requires would-be contractors to complete an application with the Central Contractor Registration and Online Representations and Certifications Application, known as CCR and ORCA respectively, in order to be awarded contracts or be paid for work performed. Like many other government forms, CCR and ORCA filing can turn out to be very time consuming and too difficult for the average person to complete on their own. Additionally, incorrect or omitted data can be costly to correct and may even result in penalties down the road.

Just as many business owners hire an accountant to complete their taxes for them and avoid costly errors, many new vendors are turning to services such as US Federal Contractor Registration to help them enter the Federal market. By working with a qualified and knowledgeable case manager, business owners can be assured that their CCR and ORCA registration are completed as accurately and quickly as possible. Case managers maintain registration for a full year, applying necessary changes or updates as needed.

Working with a qualified service also helps vendors take the next step after registration when seeking government contracts. For instance, US Federal Contractor Registration’s Targeted Marketing program helps businesses develop promotional materials such as a custom capabilities statement and SBA Dynamic Small Business Profile, set up recurring searches on FedBizOpps.gov, and use services such as FPDS.gov to identify those departments and agencies in their service area most likely to purchase their products or services.

Entering the Federal market for the first time can be daunting and the learning curve can seem steep. Adding the expertise and skill of an established service like US Federal Contractor Registration can make the difference between success and failure for new vendors.

US Federal Contractor Registration makes sense of government contracting by linking all systems into one convenient service. Their registration and marketing programs help both large and small businesses take advantage of new opportunities and find success working with the Federal Government.

Short sale / foreclosure tax info.

The Mortgage Debt Relief Act of 2007 allows taxpayers to exclude income from the discharge of debt on their principal residence through 2012. This includes debt reduced through mortgage restructuring and foreclosure, but only applies to debt used to buy, build or substantially improve your principal residence. Refinanced debt is only forgiven up to the amount that would have qualified before refinancing and the loss sustained on the short sale or foreclosure of your principal residence is not deductible.

Discharge of debt on rental property is not excluded from income. If a financial entity cancels or forgives debt of $600 or more, you will receive a Form 1099-C, Cancellation of Debt. Unless you meet one of the exceptions, this canceled debt is ordinary income and must be reported on your tax return. Exceptions include bankruptcy or insolvency. Insolvency occurs when the total of all your liabilities is more than the fair market value of all of your assets immediately before the cancellation of debt. If the cancellation of debt exceeds the amount by which you were insolvent, the difference must be reported as income.

If discharge of debt is excluded under the bankruptcy or insolvency exceptions, you must reduce your basis in the rental property by the amount of excluded cancellation of debt income. The lender's foreclosure or repossession of the rental property is treated as a sale or disposition and may result in realization of a gain or loss for income tax purposes. The gain or loss on the disposition of the property is measured by the difference between the fair market value of the property at the time of the disposition and your adjusted basis in the property. Your adjusted basis in the property is your cost plus improvements, less depreciation and less the amount of excluded cancellation of debt income.

CLEARWATER Business Accountant CPA

The net corporate income of an S Corporation is taxed at the shareholder's tax rate.
You can take distributions of these profits from your LLC at any time tax-free.

If you were a C Corporation, the corporate profit would be taxed at federal rates up to 34% max plus Florida state corp tax at 5.5%.
Then when you took cash distributions from the C Corp, they would be taxable at the dividend tax rate (currently 15%).
So if you were a C Corp, the profits would be taxed at 54.5% (34 + 5.5 + 15).

The maximum individual tax rate is 35% so you are saving about 19.5% tax by being taxed as an S Corp.
The LLC is also saving you self-employment taxes which are 15% for 2010.

Tax deductions are the often misused and misappropriated.

Deductions that are a 100% tax write off include office supplies, mileage, and employee salary.

Deductions for meals and entertainment are not valued at 100% and businesses accruing lots of these types of deductions can often owe on the non deduct-able portion of these expenses.

Tax tip.

Remember to pay your employees properly for mileage expense. If you pay employees mileage reimbursements as income you will be liable to pay extra tax payroll taxes on mileage expense. Many business make small mistakes that can often add to thousands in additional tax liability. Putting together a tax plan for your business is key to help plan for tax liability.

CPA Clearwater FL

New accounting rules require CPA's and accounts to file for a certificate to file taxes. Please make sure to check and verify that your Clearwater accountant or CPA has filed for this certificate. Tax preparation for personal and business returns is something that demands accuracy and CPA's are always the preferred filer of your returns. If you need to verify tax certificate information please https://www.myfloridalicense.com.

If you have any questions about accounting or are looking for a Clearwater FL CPA please consider Judy Driscoll

Judy Driscoll CPA will be putting out a new business start up kit to help pinellas fl business owners.

The kit will include how to file for incorporation

How to Get an EIN number

How to become an S Corp.

Complied with a list of common things new businesses need to understand.

Please email or call Judy with any business accounting questions or requests for the kit.

American Recovery and Reinvestment Act (ARRA) of 2009?

Question: What is the American Recovery and Reinvestment Act (ARRA) of 2009?

Answer: The American Recovery and Reinvestment Act (ARRA) of 2009 was signed into law by President Obama on February 17, 2009. The bill is intended to provide a stimulus to the U.S. economy in the wake of the economic downturn. The bill includes federal tax cuts, expansion of unemployment benefits and other social provisions, including domestic spending in education, health care, and infrastructure, including the energy sector.

If your business is looking to get Government Contracts and needs a cage code please visit CCR Federal Contractor Registration