Tax Payer has a Small engine repair shop in his garage, he says its a hobby. I know his making a large sum of income, QUESTION ; what is the max he can earn and still call it a hobby and our we talking gross or are we talking net ...im a new kid on the block so dont yell at me..thanks...jim s.
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Review the following Reg. - it should clarify it for you.
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The fact that the client refers to it as a hobby might be one indication that it is infact a hobby. Of course there are many facts and circumstances that can lead one to classify something as a business or a hobby.Originally posted by jim s View Post
Look at page 5-19 of the Tax Book Deluxe edition for 2006 it spells out the hobby loss rules quite nicely.Comment
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If he is having a profit it doesn't matter what he calls it.Last edited by BOB W; 11-06-2007, 11:10 AM.This post is for discussion purposes only and should be verified with other sources before actual use.
Many times I post additional info on the post, Click on "message board" for updated content.Comment
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Are you sure it doesn't matter - Wouldn't the issue of self employment tax be a concern?Originally posted by BOB W View PostComment
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How could you explain to IRS that it is a hobby when there is a profit and get away with no SE?Originally posted by New York Enrolled Agent View Post
Maybe don't keep good records?Last edited by BOB W; 11-06-2007, 11:36 AM.This post is for discussion purposes only and should be verified with other sources before actual use.
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Well say I am a woodworker and I keep no records of my expenses and I have no separate bank account, I go to maybe a couple fairs a year to sell my carvings. Mostly I do it for the joy of it giving away carvings to family and friends but occasionaly I will sell a piece. I make some $3000 a year in income.Originally posted by BOB W View Post
Does this sound like a hobby or a business?Comment
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Problem with hobby classification
Is that the only "above the line" deduction is for cost of sales. All his tools and supplies would have to go on Schedule "A" subject to 2%. I often have such types looking to deduct their tools but not wanting to account for their income.
What about a teacher on their summer break who is asked if he wants to paint a house and does so earning a nice profit. Is that a business? I hardly think so. His business is teaching. Now what if he paints a house every year? What if he builds a fence one year and a deck the next? Business or hobby? Is his intent to make a profit or to stay active outdoors?
The IRS seems to want it both ways. If it's a loss then it's a hobby. If there is a profit then it's a business. While I have had the IRS reclass a claimed business to a hobby I have never lost one the other way. The very arguments an auditor will use against a money losing business work well in the other direction. The taxpayers doesn't rely on this activity for their living expenses. They have significant enjoyment of the activity. They don't keep their books in a business like fashion. They are not working to increase their business and/or profit.In other words, a democratic government is the only one in which those who vote for a tax can escape the obligation to pay it.
Alexis de TocquevilleComment
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Sounds like a hobby to me
As long as you report the income less COS on Line 21 I would not see a problem.In other words, a democratic government is the only one in which those who vote for a tax can escape the obligation to pay it.
Alexis de TocquevilleComment
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Originally posted by DaveO View Post
Dave, your comments are well taken and has merit. I would like it to be a business so that in future years sporatic losses can be claimed, if any. But to each their own. Good Post Dave.This post is for discussion purposes only and should be verified with other sources before actual use.
Many times I post additional info on the post, Click on "message board" for updated content.Comment
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Hobby or Business
after reading all the post regarding the post that I put up, I'm inclined to say that this should be listed as a business or that this should be call other income and list it so.
I don't believe his expense out way his income, thanks for all your input...jim sComment
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My guess
This is just a guess, but I'm betting the guy is in business but he's trying to be cagey in what he tells you because he's hoping to game the system. You may need to be careful about what info you accept from him without some verification."The only function of economic forecasting is to make astrology look respectful" - John Kenneth GalbraithComment
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When I was in audit, I audited a mink farmer. He grossed around 23K a year and expenses exceeded income. Reclassified to a hobby. One of the key issues here was that he would not do the things that he said needed to be done to make it profitable.Comment
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A hobby for tax purposes is not always the same as what a taxpayer might call a hobby. A hobby for tax purposes is an activity that rarely shows a profit. A person who makes money on the side doing a hobby in his workshop is in fact operating a trade or business if he regularly shows a profit.
TTB, page 5-23 says:
Hobby income. Not subject to SE tax. Report income on line 21,
Form 1040, and deductions as miscellaneous itemized deductions,
subject to 2% AGI limitation. See page 5-19 for information
on hobbies. Note: An activity that shows a profit in three out of
five years is presumed to be a trade or business subject to SE tax,
even if it is in reality a hobby.
Court Case: The courts have ruled that an activity subject to SE tax must
be regular and continuous. A taxpayer was not liable for SE tax for doing
a one-time window installation job where he had never performed
that kind of service before, nor did he ever again at any time thereafter.
(Batok, Tax Court Memo, Dec. 28, 1992)Comment
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