‘Tis the season to wrap up your 2016 tax year. Read below for what a person’s or business’ tax responsibility may be for the last month of the year – December. Hopefully you will have time to enjoy the holiday festivities, before you have to close out your tax year.
Now that the ghouls and goblins are soon to leave us, the November tax due dates are here. Read below for what a person’s or business’ tax responsibility may be for the month of November. Hopefully you will have something to be thankful for by the end of the month. If you are not ready for your tax deadlines,
Do Stock Options Make You Feel Taxed?
Did you ever get the feeling you paid too much in taxes? Probably every paycheck, right? Did you exercise stock options or restricted stock last year? Exercise meaning, you bought the issuer’s common stock at the grant price or the price set by the option. This purchase was regardless of the stock’s price at the time you purchased the option. If so, then you should read the rest of this blog post. Continue reading
Whether an activity is a hobby or a business may not be apparent to the customers of the endeavor. However, distinguishing the difference is necessary for tax purposes. Why? Because the tax treatments are substantially different. The IRS provides appropriate guidelines when determining whether an activity is engaged in for profit, such as a business or investment activity, or if it is engaged in as a hobby.
Internal Revenue Code Section 183 (Activities Not Engaged in for Profit) limits deductions that can be claimed when an activity is not engaged in for profit. IRC 183 is sometimes referred to as the “hobby loss rule.”
This article provides information that is helpful to determine if an activity qualifies as an activity engaged in for profit. It also addresses what limitations apply if the activity was not engaged in for profit.
Is your hobby really an activity engaged in for profit?
In general, taxpayers may deduct ordinary and necessary expenses for conducting a trade or business or for the production of income. Trade or business activities and activities engaged in for the production of income are activities engaged in for profit.
The following factors, although not all-inclusive, may help you determine whether your activity is an activity engaged in for profit or a hobby:
- Does the time and effort put into the activity indicate an intention to make a profit?
- Do you depend on income from the activity?
- If there are losses, are they due to circumstances beyond your control or did they occur in the start-up phase of the business?
- Have you changed methods of operation to improve profitability?
- Do you have the knowledge needed to carry on the activity as a successful business?
- Have you made a profit in similar activities in the past?
- Does the activity make a profit in some years?
- Do you expect to make a profit in the future from the appreciation of assets used in the activity?
An activity is presumed to be engaged in for profit if it makes a profit in at least three of the last five tax years. This includes the current year (or 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.
If it is determined that your activity is not for profit, allowable deductions cannot exceed the gross receipts for the activity.
Deductions for hobby activities are claimed as itemized deductions on Schedule A and must be taken in the following order and only to the extent stated in each of the three categories:
- Expenses that a taxpayer would otherwise be allowed to deduct, such as home mortgage interest and taxes, may be taken in full.
- Deductions that do not result in an adjustment to the basis of property, such as advertising, insurance premiums, and wages, may be taken next, to the extent that gross income for the activity is more than the deductions from the first category.
- Deductions that reduce the basis of property, such as depreciation and amortization, are taken last, but only to the extent that gross income for the activity is more than the deductions taken in the first two categories.
Do you have questions about your endeavor, if it is a hobby or a business?
If you have questions related to your specific business or hobby circumstances, please give please give Alex a call at 781-848-7200. You are also welcome to leave a comment below or on our Facebook or Google+ page. Either way, Alex can help you sort through the tax treatments for what you do.
Do you feel like you are in a Snowpocalypse this year? If this winter keeps going as it has been and Massachusetts grinds to a halt, we might be reminded of a simpler time. Those olde tyme days when we might considering bartering by trading a bushel of wheat for a couple of chickens.
Nowadays, it might instead be agreeing to shovel or snowblow your neighbor’s driveway in exchange for designing a website. Just when you thought Snowpocalypse 2015 could not get any scarier, consider this: that type of exchange is barter income. Bartering is both reportable and taxable.
What is Bartering?
Bartering is an exchange of property or services. You must include the fair market value of the goods or services exchanged as income. Barter income can be taxed in a number of different ways. If you exchange a capital asset, the barter income could be taxed as a capital gain – think classic car for example. If the exchange of services involves your business or profession, it can fall into the self-employment category and thus be subject to Federal Income Tax, payroll taxes, and state taxes. If the exchange falls outside the scope of your typical business or profession, it might be reportable as ‘other income’ on line 21 of the 1040 Form. To learn more you can read IRS Topic 420 – Bartering Income.
Next time you are thinking about clearing out some snow for your 95 year old WW2 veteran neighbor, ask yourself this: Is the IRS watching?
Questions About Bartering and Snowpocalypse?
Did you have a bartering agreement with anyone last year? If you have questions, thoughts or concerns regarding how to file bartering income, WorthTax can review your taxes for you and advise you what is best for your tax filing status. We guarantee our pricing so you will never pay more than was discussed. Please feel free to contact us, leave your comments below or post to on our Facebook, Google+ or LinkedIn pages.