Your Side Hustle
With 2020 being such a rollercoaster ride and people out of work, there are so many starting a side hustle. You might be one of them. Whether it’s something you’ve been doing for years or something you just started to make extra money, the IRS says you must report income earned from hobbies in 2020 on next year’s tax return.
What the difference between a hobby and a business? A business operates to make a profit. People engage in a hobby for sport or recreation, not to make a profit.
Here are nine things taxpayers must consider when determining if an activity is a hobby or a business:
- Whether the activity is businesslike and the taxpayer maintains complete and accurate books and records.
- Whether the time and effort the taxpayer puts into the activity show, they intend to make it profitable.
- Whether they depend on income from the activity for their livelihood.
- Whether any losses are due to circumstances beyond the taxpayer’s control or are normal for the startup phase of their type of business.
- Whether they change methods of operation to improve profitability.
- Whether the taxpayer and their advisors have the knowledge needed to carry out the activity as a successful business.
- Whether the taxpayer was successful in making a profit in similar activities in the past.
- Whether the activity makes a profit in some years and how much profit it makes.
- Whether the taxpayers can expect to make a future profit from appreciating the assets used in the activity.
Remember all income must be reported on your 2020 tax return. Need help starting your business or taxes?