Remember: You Must Also Pay Taxes on Income From Hobby Activities
Whether it’s knitting, fishing, or reading books, we all need a hobby. However, if your hobby activity is a source of income, then you should make sure to report it on your tax return.
Paying Taxes on Income From Hobby Activities
Let’s begin with some basic definitions. A hobby is an activity you pursue for pure enjoyment, without intentions of making a profit.
While this seems like a clear-cut definition, things are not always so simple. For example, it happens often that people begin selling the products of their hobby. Do they have to report that income on their tax return?
The answer is yes. If you receive income from an activity you carry out with no intention of making a profit, then you should report it on your tax return, specifically on Schedule 1, Form 1040.
On the other hand, any income from for-profit activities should be reported on Schedule C.
When determining whether an activity is a hobby or a for-profit business, the following factors are taken into account:
- Whether you carry out that activity like a business, and maintain complete and accurate books and records.
- Whether the time and effort you put into the activity shows you intend to make it profitable.
- Whether you depend on income from the activity for your livelihood.
- Whether any losses are due to circumstances beyond your control or are normal for the startup phase of their type of business.
- Whether you change the way you carry out that activity to improve profitability.
- Whether you have the knowledge needed to carry out the activity as a successful business.
- Whether you were successful in making a profit in similar activities in the past.
- Whether the activity makes a profit in some years and how much profit it makes.
- Whether you can expect to make a future profit from the appreciation of the assets used in the activity.
If you find it difficult to figure out whether an activity is a hobby or a business, don’t hesitate to contact a tax professional. They will help you figure out the tax strategy that better fits your unique situation.
Contact the Experts at JT Tax Services
Do you need help preparing your taxes? At JT Tax Services, we give you the peace of mind that comes with knowing that you are limiting your liability while staying compliant with all regulations.
We are located in Oxnard, California. Contact us today by email (firstname.lastname@example.org), telephone (805-984-8890), or through our social media accounts on Facebook, Twitter, and LinkedIn to schedule a consultation or to learn more about our services.