Hobby and Business (Continued): The Difference in Tax Implications

As mentioned in our previous post, it is quite common for individuals to engage in other activities aside from their work, and earn extra cash for it. These activities range from freelance writing to selling crafts, and even to more technical hobbies like graphic design.  And although there isn’t anything wrong with earning some extra income, these types of activities can impact your taxes due.

So, whether you prepare your own taxes or have a tax accountant do them for you, this is an area that requires attention.  You don’t want the misplacement of this income to come back to you in the future with IRS penalties!

Since we’ve already discussed the factors that separate a hobby from a business (See: Three Factors That Separate A Hobby From A Business), let’s now talk about the difference in tax treatment.

If you’ve determined that your sideline activity is a hobby, the IRS has limited the deductions you can claim. You can only deduct those expenses up to the point of your income from that hobby. Therefore, losses incurred from hobbies cannot be used to offset regular income. This is why it may be more beneficial to declare your hobby as a business if possible.

As a business, you’ll be able to deduct expenses directly from your income. In fact, you may be able to deduct overall business losses even in years when it does not turn a profit!

However, as a word of caution, declarations like this must be less strategic and more honest.  Otherwise, you could run into trouble with the IRS. So, to make sure you are well guided at all times, seek expert assistance from a business tax accountant.

Marietta Financial would love to assist you with your questions concerning this matter or any other tax related issues.  Feel free to give us a call!