For Love or Money – Is Your Side Hustle a Business or a Hobby?

Large losses on a taxpayer’s Schedule C, Profit or Loss from Business (Sole Proprietorship) tend be a red flag waving in the face of the IRS. And when this happens for too many years, those tax returns can be especially inviting to closer examination.

Consider the following cases:

  • An artist operates for many years, reporting losses in all but two years of the last few decades.
  • A sports memorabilia agent operates for many years, with relatively small profit on a few years and significant loss in the three years under review.

On the face they appear to be considering the same issue and, you would think, reach the same conclusion – each one is a sole proprietor who completed a Schedule C on their individual returns and reported big losses, some that carried forward for years — looks like these are probably expensive hobbies.

The list below is of factors that are under consideration when determining whether a taxpayer has a profit motive – and that’s where things between these two cases are vastly different.

The list, not exclusively, is the following:

  1. The manner in which the taxpayer carries on the activity
  2. The expertise of the taxpayer or his advisors
  3. The time and effort expended by the taxpayer in carrying on the activity
  4. The expectation that assets used in the activity may appreciate in value
  5. The success of the taxpayer in carrying on other similar or dissimilar activities
  6. The taxpayers history of income or losses with the respect to the activity
  7. The amount of occasional profits, if any, which are earned by the taxpayer
  8. The financial status of the taxpayer
  9. Elements of personal pleasure or recreation

No single factor is conclusive, and the court can afford greater weight to one over another given the facts and circumstances of each case. These two Tax Court decisions regarding sole proprietorships have given insight into what the court looks at, and how carefully they consider, all information and circumstances when profit motive of a sole proprietor is in question.

So, carefully consider now – is your side hustle for love or money? How will you prove it if the need arises?

Here are a few suggestions:

  • Keep accurate and timely records
  • Devote time to the business side of your activity – inventory, recordkeeping, networking, and follow-up
  • Develop your experience and consult with experts in the field
  • Determine if your business is, or reasonably may be in the future, a means of support for yourself or family
  • Dedicate significant portions of your personal time to the pursuit of creating a profit in your business
  • Cultivate new skills and periodically evaluate and change, as necessary, your business practices to be more profitable
  • Enjoying your business is acceptable, but there should be definite elements of demand and market for the goods, products, or services

 

This article was first published on LinkedIn via LinkedIn Pulse on October 22, 2015.

What to Do if You Experience Tax-Related Identity Theft

As identity thieves become ever more advanced, taxpayers must take extra precautions to protect themselves from identity theft. Not only is the toll a costly financial exercise, the inconvenience, frustration, and emotional toll is one that is difficult to withstand.

Many of us have experienced having a credit or debit card number compromised, but tax-related identity theft occurs with someone uses your stolen Social Security number to file a tax return to claim a fraudulent refund. Over 19 million suspicious returns have been stopped by the IRS between 2011 and October 2014.

Those that have experienced tax-related identity theft usually do not find out about it until they attempt to file a tax return and the e-file is rejected as a duplicate return, or they receive an underpayment or underreporting notice from the IRS because someone has used their Social Security number for employment or other reporting, such as assistance benefits.

What should you do if your Social Security number has been compromised? The IRS recommends the following:

  • File a report with the local police.
  • File a complaint with the Federal Trade Commission at www.identitytheft.gov or the FTC Identity Theft Hotline at 1-877-438-4338 or TTY 1-866-653-4261.
  • Contact one of the three major credit bureaus to place a ‘fraud alert’ on your credit records:
    • Equifax, www.Equifax.com, 1-800-525-6285
    • Experian, www.Experian.com, 1-888-397-3742
    • TransUnion, www.TransUnion.com, 1-800-680-7289
  • Close any accounts opened without your permission or tampered with.

If your SSN is compromised and you know or suspect you are a victim of tax-related identity theft, take these additional steps:

  • Respond immediately to any IRS notice; call the number provided
  • Complete IRS Form 14039, Identity Theft Affidavit. Use a fillable form at IRS.gov, print, then mail or fax according to instructions.
  • Continue to pay your taxes and file your tax return, even if you must do so by paper.

If you previously contacted the IRS and did not have a resolution, contact the Identity Protection Specialized Unit at 1-800-908-4490. They have teams available to assist.  Additionally, the IRS is continuing a pilot program for those that live in Florida, Georgia, or the District of Columbia. Not only have 1.5 million six digit Identity Protection PINs already been issued, those that filed a tax return last year with an address in the areas mentioned above may choose to get an IP PIN. It is important to remember that you currently cannot opt out once you get an IP PIN. You must use an IP PIN to confirm your identity for returns you file from the point you receive the IP PIN and in all future returns. You should receive a new PIN each year, typically in December.

For more information, visit www.irs.gov and search identity theft.

 

This article was first published on LinkedIn via LinkedIn Pulse on July 29, 2015.

A Practical Point in the Face of Tragedy

May 11, 2015

I was shocked this morning to wake up to the news that a sorority sister’s husband had passed away suddenly.  He was the same age as my husband and I, a fraternity brother of my husband, in fact.

Getting older, the sudden loss of a peer due to health reasons rather than an accident, coupled with watching our parents age, brings uncomfortable thoughts and stark realities into clearer focus.

These tragic circumstances always bring practical questions to my mind.  In the case of my sorority sister, her husband was a self-employed attorney and she was his paralegal. I am left wondering if they have life insurance, what is the status of the cases they had pending, do they have savings that will get her through the next few weeks?  How will she continue to provide for her daughter now that not only is her husband gone, but also her job?

It is said that nothing is for certain but death and taxes.  And as cliché as that is, there is truth in the statement.  So many hurts will be resurrected next year as she goes through the process of filing their final tax return as a couple, if there is a need for an estate return, gathering information and working to determine what is actually needed to get this requirement of life – even in death – completed.

I have prepared tax returns for soldiers killed in action, for couples after a sudden death, and for those that know the inevitable is coming.  It is tragic, and an honor to serve those who are coping with this pain.  There are tools, resources, and professionals out there guide loved ones through this process, call upon them to make this as smooth as this process can be.

For friends and family assisting those they love through this tragic time, be a shoulder to cry on, a rock in the tide, and a source of information in the time of need.

Here is a starting point from the IRS, http://www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/Deceased-Taxpayers-Probate-Filing-Estate-and-Individual-Returns-Paying-Taxes-Due

Nothing will make this process completely pain free, but we can strive to make it less stressful and painful.

This article was first published on May 11, 2015, via Linked In Pulse on my Linked In profile.