Quick Reference for Tax Professionals ? Hobby or Income?

Mar 11, 2015

As a tax professional, you know find there is no solid line drawn between a hobby and income. To help establish the difference with your clients, here are a few questions you can ask your client to help you differentiate between the two

Do you conduct activities in a businesslike manner?
Do you put time and effort into the activity with the intention of making it profitable?
Do you depend on income from the activity for your livelihood?
Are your losses due to circumstances beyond your control or are they normal business startup losses?
Have you changed your methods of operation in an attempt to improve profitability?
Do you or your advisors have the knowledge needed to carry on the activity as a successful business?
Were you successful in making a profit in similar activities in the past?
Has the activity made profit in some years and how much?
Can you expect a future profit from the appreciation of the assets used in the activity?

In this modern age there are a lot of miscellaneous ways to make a little or a lot of money. Some of which I didn’t even realize were out there until I did a little research today. There is everything from selling crafts on Etsy, to renting out a space in your home on Airbnbers, or joining Uber Car where you use your car to give people a lift.

As a tax preparer it is your responsibility to identify what the types of income are and record them correctly. Just because your client spends money and doesn’t have income doesn’t mean it’s a business.

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