All Things Taxes

Posted By JK Harris on January 12, 2009

According the IRS, if your favorite activity makes a profit every year or so, there might be tax issues that you are not aware of.  The IRS defines a hobby as a not-for-profit activity; something that is recreational and is not pursued for profit.  Your activity could be considered a business if it is carried on with the expectation of earning a profit.
Keep in mind, the first two years of your activity, you are entitled to write off your losses, but if you have not turned a profit by the beginning of year three, be prepared for the possibility of facing an audit.
Thinking about turning your hobby into a business?  Here are a few tips to get you started and to help avoid tax problems:

• Have a sound business plan in place.
• Be sure to keep your personal and business banking accounts completely separate. Do not co-mingle funds.
• Meet with professionals in the field you are considering. They may be able to offer you advice and guidance on the best way to run your business.
• Invest the necessary time to launch your business.

If you are not sure which category you fall under remember that an activity is considered a business if it is profitable for three out of five years.  A tax professional can assist you in preparing your returns if necessary.

Category: Tax Alerts, Tax Problems
Tags: avoid tax problems, hobby vs business, IRS