Here’s how to tell the difference between a hobby and a business for tax purposes

A hobby is any activity that a person pursues because they enjoy it and with no intention of making a profit. People operate a business with the intention of making a profit. Many people engage in hobby activities that turn into a source of income. However, determining if that hobby has grown into a business can be confusing.

To help simplify things, the IRS has established factors taxpayers must consider when determining whether their activity is a business or hobby.

These factors are whether:

  • The taxpayer carries out activity in a businesslike manner and maintains complete and accurate books and records.
  •  The taxpayer puts time and effort into the activity to show they intend to make it profitable.
  • The taxpayer depends on income from the activity for their livelihood.
  • The taxpayer has personal motives for carrying out the activity such as general enjoyment or relaxation.
  • The taxpayer has enough income from other sources to fund the activity
  • Losses are due to circumstances beyond the taxpayer’s control or are normal for the startup phase of their type of business.
  • There is a change to methods of operation to improve profitability.
  • Taxpayer and their advisor have the knowledge needed to carry out the activity as a successful business.
  • The taxpayer was successful in making a profit in similar activities in the past.
  • Activity makes a profit in some years and how much profit it makes.
  • The taxpayer can expect to make a future profit from the appreciation of the assets used in the activity.

All factors, facts, and circumstances with respect to the activity must be considered. No one factor is more important than another.

If a taxpayer receives income from an activity that is carried on with no intention of making a profit, they must report the income they receive on Schedule 1, Form 1040, line 8.

Call the Crosslin tax team at 615-320-5500 with any questions.  We are here to help!

Why it may take longer than 21 days for some taxpayers to receive their federal refund

The IRS issues most refunds in fewer than 21 days for taxpayers who file electronically and choose direct deposit. However, some returns have errors or need more review and may take longer to process.

Things that can delay a refund:

The IRS will contact taxpayers by mail if it needs more information to process their return.

The fastest way to get a tax refund is by filing electronically and choosing direct deposit.

Taxpayers can check the status of their refund online.

To check the status of a refund, taxpayers should use the Where’s My Refund? tool on IRS.gov. If taxpayers file electronically, they should wait twenty-four hours before checking the status of their refund. If taxpayers file a paper return, they should wait four weeks before checking the status.

IRS representatives on the phone and at Taxpayer Assistance Centers can only research the status of a refund if:

  • It’s been 21 days or more since the taxpayer filed the return electronically.
  • It’s been six weeks or more since the taxpayer mailed the return.
  • The Where’s My Refund? tool tells the taxpayer to contact the IRS.

As always, contact the Crosslin tax team at (615) 320-5500 with any questions.  We appreciate your business!

Taxpayers must report tip money as income on their tax return

For those working in the service industry, tips are often a vital part of their income. Like most forms of income, tips are taxable. Therefore, it’s also vital that people understand the tax obligations that come with tip income. Here’s some information to help taxpayers report tip income so they don’t receive a surprise tax bill.

Taxpayers must include all tips they receive in their gross income. This includes:

  • Tips directly from customers.
  • Tips added using credit, debit or gift cards.
  • Tips from a tip-splitting arrangement with other employees.

The value of non-cash tips, such as tickets, passes or other items of value is also income and subject to tax.

Three things can help taxpayers to correctly report their tip income.

  • Keep a daily tip record.
  • Report tips to their employer.
  • Report all tips on their income tax return.

What employers need to know

If an employee receives $20 or more in any month, they must report their tips for that month to their employer by the 10th day of the next month. The employer must withhold federal income, Social Security and Medicare taxes on the reported tips.

Call the Crosslin tax team at (615) 320-5500 with any questions.  We are here to help!

Tips to help taxpayers reduce tax-time stress

Each tax season comes with unique challenges and 2022 is no exception. The IRS wants taxpayers to get the information they need as quickly as possible. Taxpayers should keep these tips in mind when they get ready to file. Following them will help get this year’s taxes done accurately and refunds issued timely.

  • Avoid errors. Taxpayers should review their tax return so they can file a complete and accurate return and avoid refund delays. Filing electronically is the most accurate way to file. Taxpayers should check all names and double check all Social Security numbers, bank account and routing numbers.
  • Gather recordsGood recordkeeping makes preparing a tax return easier. It can also ensure taxpayers do not overlook deductions and credits.
  • Start with IRS.gov. IRS.gov is available around-the-clock and it’s the fastest way to get assistance. Millions of people use IRS.gov for filing and paying taxes, getting information about their accounts or answers to tax questions. The IRS Services Guide PDF outlines the many ways taxpayers can get help from the IRS.
  • Use online tools. IRS.gov has many useful online tools. The Interactive Tax Assistant provides answers to many tax questions specific to an individual’s circumstances. It gives the same answers that an IRS representative would give over the phone.
  • Report all income. Taxpayers must report their taxable income from all sources, including the gig economy, Forms W-2Wage and Tax Statements, and Forms 1099. Other income may be taxable, even if the taxpayer does not receive a statement.
  • Report unemployment benefits. Taxpayers who received unemployment benefits in 2021, must report the amount as taxable income on their tax return.
  • Access online account or review IRS letters. This year, people must have the total amounts of their advance child tax credit payments and their Economic Impact Payments on hand when filing. They can check online account or review Letter 6419, 2021 Total Advance Child Tax Credit Payments, and Letter 6475, Your 2021 Economic Impact Payment, for their total payment amounts to help them file an accurate return.
  • Choose a reputable preparer. Taxpayers can self-prepare or use a tax preparer. IRS.gov has resources to help people choose a tax pro. The IRS Directory of Federal Tax Return Preparers provides information on who has a professional credential or participates in the IRS Annual Filing Season Program.
  • File electronically. IRS Free File online can help taxpayers claim their earned income tax creditchild and dependent care creditchild tax credit and recovery rebate credit. Some Free File options are available in Spanish. MilTax online software is available for members of the military and certain veterans, regardless of income, and is offered through the Department of Defense. Eligible taxpayers may prepare and file their federal returns and up to three state returns for free.
  • Choose direct depositFiling electronically and choosing direct deposit is the safest and easiest way to file an accurate tax return and the fastest way to get a refund.

If you have any questions, contact the Crosslin tax team at (615) 320-5500.  We are here to help!