Taxes for Helping a Friend

Today TaxMama hears from Gayle in the TaxQuips Forum with a common misconception. She asks, “Do I have to become a business to write off expenses on my taxes? I make a product for a friend of mine. I buy all the materials. I do this to help their family business. They pay me for each one I make as they get ordered. I am already this year at about $600. They are going to 1099. I do not make much of anything in the way of profit by the time I pay for materials. The problem I see for me is that I will have to pay taxes on this money when I did not make a profit. “

Bill Kotchish of the Tax Shack in North Carolina gives Gayle the good news. Gayle, you won’t be paying much in taxes.
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But, you have to decide if you consider this activity a Hobby or a Business (trying to make money)?  The IRS treats each a little differently.

The Hobby income is reported on Line 21 of Form 1040 (Other Income).  Make sure you report all the income shown on the 1099-MISC you receive. Even though you are allowed to deduct your expenses from your gross income, the two problems with a Hobby are

1)       You may only deduct your expenses up to the amount of your income.  i.e., you cannot have a net Loss.  If you lose a little on the deal, so what – it’s a fun hobby for you, right?

2)       The expenses you are able to deduct will appear on Schedule A as Miscellaneous Itemized deductions. So if you don’t itemize, you may not be able to deduct the expenses at all.

However, if you are trying to make a profit in the long run, you are a business.  In this case, if your expenses are more than your gross income, the IRS will allow you to have a Net Loss (within a reasonable timeframe of a couple years and if you clearly run your business in a business-like manner).

  What this means is that you may apply this business loss toward other income on your tax return (wages, interest, etc.), which effectively reduces the amount of tax on all your household income.
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Rita Lewis the enrolled agent from CT adds another interesting tidbit. One other difference between how you report net income from a hobby or from a business:  if your hobby has a profit, you do not pay self-employment tax on that profit, only income tax; if your business has a profit, you pay self-employment tax as well as income tax so would have a Schedule SE on your Form 1040.

And remember, you can find answers to all kinds of questions about hobbies and businesses considerations and other tax issues, free. Where? Where else? At

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