In the series we started earlier this week Hobby vs. Business we briefly mentioned several factors that the IRS will use to determine if the activity you are engaged in is actually a business where you can deduct expenses that you incur in trying to make the business work or if it is actually just a hobby where you would not be permitted to deduct any expenses. The difference could mean a lot of money in your pocketbook or going to Uncle Sam.
Anyway, the first of the factors is: does the time and effort put into the activity evidence an intention to make a profit.
So this one sounds easy enough. The underlying assumption is that if you are working and trying to make a profit you are going to be putting a certain level of effort into the activity. Now just putting effort into something does not mean you are working in a business. You also have to be working towards making a profit. For example, I enjoy video editing. I do a lot of work for myself and for my church. I spend a lot of time on this for several reasons: first, because I don’t spend a lot of consistent time doing the work, it takes me longer to get it done; second, the work, by its nature, takes a long time. I, therefore, spend a lot of time doing the work. On the other hand, I do some projects as a business. I do several things activity to show that I am working toward making a profit. First of all, I spend some time advertising, we spend time working with clients, I manage costs, keep up with records and do professional work. I may not spend 40 hours per week doing this work, but that is not required. Making sure the time and effort that you are putting toward the work is with the intention to make a profit and not just for fun is the key to this factor.
Any questions? Make a comment on this post and we can continue the conversation.
So from your example, since you do some work for free (for yourself and for the church) but you also make money doing that for others, is it consider a business or hobby by the IRS?
What if you incur expenses for the free work for your church, can you deduct that? If yes, all or part?
I am in a very similar situation, I do several things to try to make additional money…software programming, website design, photography. I also do no-charge work for some charity organizations. I incur cost both in the no-charge work and work for money. Which and how much expenses can I deduct? Does the IRS view my activites as hobby or business or both?
What is your advice for me on minimizing my taxes.
Hi Mona,
Thanks for your questions. You raise some good points. This area of the law can best be described as gray. In order to be able to deduct an expense as a business expense on your tax return the expense must have been incurred with the intent to make a profit. Basically, whether you are in business or just doing a hobby depends largely on your intent and how you treat the activity. Do you do things formally, keep accurate records, do you have a separate bank account for the business, etc.
Also, in answering your question from another post, just because you have another full time income doesn’t mean you cannot treat this venture as a business. As long as your venture has the intent to make a profit you should be alright deducting the expenses.
Finally, the expenses incurred when you do work for your church which you may not be charging for could be considered a contribution to a tax-exempt organization and treated like any tithe or offering to your church.
And, like any good lawyer, I have to add on the following disclaimers:
# IRS CIRCULAR 230 NOTICE: To ensure compliance with requirements imposed by the IRS, we inform you that any U.S. tax advice contained in this communication (or in any attachment) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed in this communication (or in any attachment).
# Finally, as a disclaimer, I need to do my ethical duty as an attorney and let you know that this blog is meant to provide general tax and legal information and not specific information for your particular situation. Before relying on any tax advice from this site, you should consult a competent tax professional to discuss the specifics of your case.
thanks very much for your advice!
as for the disclaimers…i wouldn’t expect anything less (:
thanks again and have a great holiday!