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Arts and Crafts Business IntentYour arts and crafts business meets the business versus hobby criteria if you have a profit three years out of the last five tax years. Here are some additional items to consider when deciding if you can be taxed a hobby or a business:
First, I want to point out the most important key ingredient that the IRS uses to determine if you are a real business: a 1099MISC showing an amount under “non-employee compensation.” There are numerous guidelines as to what constitutes a business versus a hobby and this one is never mentioned. Yet it’s the most important factor as far as the IRS is concerned! If you receive a 1099MISC, the IRS counts that as self-employment and they will tax you not just income tax, but an additional 15% self employment tax. As a professional preparer, if I see one of those, even if I truly believe that your business should be classified as a hobby, I’m preparing a Schedule C showing you as a business. That’s how the IRS is treating that income.
Talking about taxes is no fun (kind of like having a root canal with no laughing gas). Matter of fact, it’s stressful as heck, but we must. With the new year (and tax season) right around the corner, it is time to get our financial houses in order. There seems to be a lot of confusion about whether an activity we are pursuing should be viewed as a small business versus a hobby. The Internal Revenue Service (IRS) assumes that if you start a business, you intend to make money at it. If this is not the intention, your business is likely to be a hobby. Taxpayers often get confused when their hobby suddenly begins to generate some income and immediately classify it as a small business. The IRS defines a hobby as any activity “for sport or recreation, not to make a profit.” While this is still not entirely clear for some, the key consideration is intent.