You’ve loved dogs all your life so you decide to start a dog
training business. Turning your hobby into a business can provide tax
benefits if you do it right. But it can create a big tax headache if you do
it wrong.
One
of the main benefits of turning your hobby into a business is that you can
deduct all your qualified business expenses, even if it results in a loss.
However, if you don’t properly transition your hobby into a business in the
eyes of the IRS, you could be in line for an audit. The agency uses several
criteria to distinguish whether an activity is a hobby or a business. Check
the chart below to see how your activity measures up.
The business-versus-hobby test
If
your dog training business (or any other activity) falls under any of the
hobby categories on the right side of the chart, consider what you can do
to meet the business-like criteria on the left side. The more your activity
resembles the left side, the less likely you are to be challenged by the
IRS.
On
the other hand, if you determine that you’re really engaged in a hobby,
there are still some tax benefits to be had. You can treat hobby expenses
as a miscellaneous itemized deduction on a tax return, but generally not
more than hobby income. They can be used to reduce taxable income if they
and other miscellaneous expenses surpass 2 percent of your adjusted gross
income.
If
you need help to ensure you meet the IRS’s criteria for businesslike
activity, reach out to schedule an appointment.
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