Is it a business or a hobby?
To my DJ friends, this is a good one for you to consider, for example, when you get paid to play a set here and there. The IRS totally cares how you are reporting that income, because of the different tax implications – for you, and for the IRS, who loses out on millions of tax dollars each year due to “mis-classifications.”
The burden is on YOU to prove that the moolah is business related, and not hobby income.
Expenses related to your hobby can be deducted to the extent of your hobby income. Expenses related to your BUSINESS, can be deducted entirely, thus possibly reducing your total tax liability. To prove that you’re a legit business you have to pass 9 tests, which I will explain below, but the CliffsNotes version is this: It all comes down to INTENT. Want to make sure you’re reporting your income with the right INTENT to minimize your tax liability? I can totally help you with that.
In the meantime, here are the 9 tests:
1) Are you keeping accurate books and using them to improve your performance?
2) Are you seeking professional guidance to improve your business practices? (Call me)
3) Are you investing enough time to make the business successful?
4) Are you planning to generate a profit from the appreciation of assets?
5) Have you gone from being unprofitable to profitable in similar activities?
6) Have you been profitable in at least three of the past five years for most businesses?
7) The amount of occasional profits, if any, which are earned.
8) Do you have other sources of income that are being offset by the activity?
9) Does the activity have significant personal elements (indicates a hobby)?