Tax Tips for Hobbies that Earn Income

Millions of people enjoy hobbies such as stamp or coin collecting, craft making, and horse breeding, but the IRS may also consider them a source of income. As such, if you engage in a hobby that provides a source of income, you must report that income on your tax return; however, taxpayers (especially business owners) should be aware that the way income from hobbies is reported is different from how you report income from a business. For example, there are special rules and limits for deductions you can claim for a hobby.

Here are five basic tax tips you should know if you get income from your hobby:

Business versus Hobby. There are nine factors to consider to determine if you are conducting business or participating in a hobby. Make sure to base your decision on all the facts and circumstances of your situation. To learn more about these nine factors, please call.

Allowable Hobby Deductions. You may be able to deduct ordinary and necessary hobby expenses. An ordinary expense is one that is common and accepted for the activity. A necessary expense is one that is helpful or appropriate. Don’t hesitate to call if you need more information about these rules.

Limits on Expenses. As a general rule, you can only deduct your hobby expenses up to the amount of your hobby income. If your expenses are more than your income, you have a loss from the activity. You can’t deduct that loss from your other income.

How to Deduct Expenses. You must itemize deductions on your tax return in order to deduct hobby expenses. Your costs may fall into three types of expenses. Special rules apply to each type. Use Schedule A, Itemized Deductions to report these types of expenses.

Use a tax professional. Hobby rules can be complex, but using a tax professional makes filing your tax return easier. If you need have any questions about reporting income from a hobby, please call.

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Small Business Tax Tips: Health Care Tax Credit

As a small employer, you may be eligible for a tax credit that lets you keep more of your hard-earned money. It’s called the small business health care tax credit, and it benefits employers that:

  • offer coverage through the small business health options program, also known as the SHOP Marketplace
  • have fewer than 25 full-time equivalent employees
  • pay an average wage of less than $50,000 a year ($52,400 in 2017 as adjusted for inflation)
  • pay at least half of employee health insurance premiums

Here are five facts about this credit:

  • The maximum credit is 50 percent of premiums paid for small business employers and 35 percent of premiums paid for small tax-exempt employers.
  • To be eligible for the credit, you must pay premiums on behalf of employees enrolled in a qualified health plan offered through a Small Business Health Options Program Marketplace, or qualify for an exception to this requirement.
  • The credit is available to eligible employers for two consecutive taxable years beginning in 2014 or later. You may be able to amend prior year tax returns to claim the credit for tax years 2010 through 2013 in addition to claiming this credit for those two consecutive years.
  • You can carry the credit back or forward to other tax years if you do not owe tax during the year.
  • You may get both a credit and a deduction for employee premium payments. Since the amount of your health insurance premium payments will be more than the total credit, if you are eligible, you can still claim a business expense deduction for the premiums in excess of the credit.

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Understanding CP2000 Notices

The CP2000 is a notice commonly mailed to taxpayers through the United States Postal Service. It is generated by the IRS Automated Underreporter Program when income reported from third-party sources such as an employer does not match the income reported on the tax return.

What to do if you Receive a CP2000 Notice:

The CP2000 is not a tax bill, it merely informs you about the information the IRS has received and how it affects your tax; however, it is important to pay attention to what your CP2000 Notice states because interest accrues on your unpaid balance until you pay it in full. If you cannot pay the full amount that you owe, then you can set up a payment plan with the IRS.

If you receive a CP2000 Notice in the mail complete the response form. If your notice doesn’t have a response form, then follow the notice instructions. If the new information is wrong, then check the notice response form for instructions on what to do next. You also may want to contact whoever reported the information and ask them to correct it.

Note: If the information is wrong because someone else is using your name and social security number please call the IRS and let them know. You also can the link on the IRS Identity theft information webpage to find out more about what you can do.

Do I need to amend my return?

If the information displayed in the CP2000 notice is correct, you don’t need to amend your return unless you have additional income, credits or expenses to report. If you agree with our notice, follow the instructions to sign the response page and return it to the IRS in the envelope provided.

If you have additional income, credits or expenses to report, you may want to complete and submit a Form 1040-X, Amended U.S. Individual Income Tax Return. If you need assistance with this, please call the office.

How to Avoid Receiving a CP2000 Notice:

  • keep accurate and detailed records
  • wait until you receive all of your income statements before filing your tax return
  • check the records you receive from your employer, mortgage company, bank, or other sources of income (W-2s, 1098s, 1099s, etc.) to make sure they are correct
  • include all your income on your tax return including that from a second job or fees derived from the sharing economy (e.g. renting a spare room out on Airbnb)
  • follow the instructions on how to report income, expenses and deductions
  • file an amended tax return for any information you receive after you’ve filed your return
  • Use a professional tax preparer who will help you avoid mistakes and find credits and deductions you may qualify for.

Beware of Fake IRS Tax Bill Notices

Taxpayers and tax professionals should be on guard against fake emails purporting to contain an IRS tax bill related to the Affordable Care Act. Generally, the scam involves an email notice that is sent electronically–even though the IRS does not initiate contact with taxpayers by email or through social media platform. The fake CP2000 notice is sent as an attachment.

Don’t hesitate to contact the office if you have any questions about IRS notices or letters you have received in the mail or otherwise.

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Using QuickBooks’ Income Tracker

You can get an enormous amount of useful information from QuickBooks’ reports, especially if you customize them to isolate the precise data you want. Reports included with the software range from the very simple, like Open Invoices, to output that’s exceptionally complex, like Trial Balance and Profit & Loss.

Warning: Standard financial reports like Trial Balance are easy to run in QuickBooks, but very difficult to understand and analyze. You should, though, be aware of what they’re telling you at least once a quarter – even once a month in some cases. Please call if you need help with this.

Sometimes, especially first thing in the morning as you’re planning your day, you just want to cut to the chase and get a quick overview of your company’s finances. That’s where QuickBooks’ Income Tracker comes in. It not only provides that overview, but it also contains links to related screens where you can do the work that’s needed there. Continue reading

The Sharing Economy and your Taxes

Uber, Lyft, Airbnb, Etsy, Rover, TaskRabbit. If you’ve used any of these services–or provided services for them to others–you’re a member of the sharing economy.

If you’ve only used these services (and not provided them), then there’s no need to worry about the tax implications but if you’ve rented out a spare room in your house through a company like Uber or Airbnb then you’re probably collecting a fee–a portion of which goes to the provider (in this example, Airbnb) and a portion that you keep for providing the service. But whether it’s your full-time gig or a part-time job to make some extra cash, you need to be aware of the tax consequences.

Millennials are the number one users of the sharing economy but Gen X and Boomers use it too; and a recent PWC study found that 24 percent of boomers, age 55 and older, are also providers. While many people are looking to earn a bit of extra income, some dive into it full-time hoping they can make a living, and still, others simply enjoy meeting new people or providing a service that helps people. What most people don’t realize is that this extra cash could impact their taxable income–especially if they have a full-time job with an employer. Continue reading

Scam Alerts: Hurricane Charities and Ransomware

While The IRS, state tax agencies and numerous people in the tax and accounting industry are working together to warn tax professionals and their clients about phishing scams, they are still all too common. Here’s what you need to know about the two most recent scams: fake charities that take advantage of people’s generosity during times of natural disasters and IRS/FBI-themed ransomware.

Fake Charity Scams Relating to Hurricane Harvey

With Houston still reeling from the devastating effects of Hurricane Harvey, many people are wondering how they can help. One of the best ways to do this is by donating to a charity that helps victims affected by natural disasters. Unfortunately, however, due to the prevalence of tax scams, taxpayers need to make sure the organization they donate to is not a fake charity set up by unscrupulous criminals looking to make a fast buck or get people’s personal information. Continue reading

SIMPLE IRA Plans for Small Business

Of all the retirement plans available to small business owners, the SIMPLE IRA plan (Savings Incentive Match PLan for Employees) is the easiest to set up and the least expensive to manage. The catch is that you’ll need to set it up by October 1st. Here’s what you need to know.

What is a SIMPLE IRA Plan?

SIMPLE IRA Plans are intended to encourage small business employers to offer retirement coverage to their employees. Self-employed business owners are able to contribute both as employee and employer, with both contributions made from self-employment earnings. In addition, if living expenses are covered by your day job (or your spouse’s job), you would be free to put all of your sideline earnings, up to the ceiling, into SIMPLE IRA plan retirement investments. Continue reading