On this episode of the Teaching Tax Flow podcast, we jump into the intricacies of "Hobby Loss Rules." Aimed at demystifying the often confusing threshold between hobbies and businesses, the hosts break down how the IRS defines and treats these activities differently for tax purposes. The discussion is particularly timely given the changes brought about by the Tax Cuts and Jobs Act of 2017, which altered how hobby expenses are deducted.
Throughout the episode, Chris and John explain the nine-factor test the IRS uses to determine whether an activity is a hobby or a business. They illustrate these points with relatable examples, such as the potential tax implications of John's "passion" for knitting and dog breeding. The hosts also stress the importance of maintaining detailed records and having a clear profit motive to ensure an activity is classified as a business, thereby allowing for the deduction of legitimate expenses on your tax return.
Key Takeaways:
- IRS Hobby vs. Business: Understand the IRS's nine-factor test to determine if an activity is a hobby or a business.
- Tax Reporting: Recognize how to report income and expenses from hobby activities versus business activities.
- Impact of Tax Cuts and Jobs Act: Learn how changes from the 2017 Tax Cuts and Jobs Act affected the deduction of hobby expenses.
- Practical Examples: Real-world scenarios provided to illustrate what counts as a hobby and what qualifies as a business.
- Next Steps: Practical advice on maintaining proper records and showing profit motives to ensure your activity is seen as a business.
Notable Quotes:
- "The main issue is whether an activity is a hobby or business in the eyes of the IRS."
- "Profit motive is crucial; hobbies typically have little effort to acquire the necessary expertise to consult a professional."
- "For an expense to be deductible in your tax return for a business, the expense has to be ordinary and necessary."
- "Under the Tax Cuts and Jobs Act of 2017, hobby expenses are no longer deductible, making it crucial to ensure your activity is classified correctly."
- "The IRS provides a safe harbor guideline, known as the three out of five-year rule, which presumes profit motive if an activity generates profit in three out of five consecutive years."
Episode Sponsor:
The Mortgage Shop
- (00:04) - Understanding Hobby Loss Rules to Minimize Lifetime Taxes
- (02:58) - Hobby Versus Business: Tax Reporting and Rule Changes
- (05:18) - Discussing Hobbies, Movies, and Financial Losses from Knitting
- (07:13) - Determining If an Activity Is a Hobby or Business
- (11:18) - Hobby vs. Business: The Gray Area of Tax Deductions
- (12:27) - Determining Business vs. Hobby for Tax Purposes
- (15:07) - Tax Implications of Hobby vs Business Income
- (18:53) - Hobby Income Reporting and 1099K Changes
- (19:55) - Business vs. Hobby: Tax Implications for Dog Breeding
- (22:06) - Listener Appreciation and Engagement in the Defeating Taxes Podcast
- (24:18) - Educational Investment and Tax Advice Disclaimer
