Any tax guys here? Business vs. Hobby question

Quick question, hopefully. What are the rules regarding a business vs. a hobby? Specifically, what about the profit and business expenses claimed?

I'm a referee for ice hockey, and am an independent contractor so my home is my place of business, and any travel from there to an ice rink to ref a game is a business expense.

In the past, I've usually made between $1500 and $8000 doing this, AND any time that I traveled home to see my parents I'd try to pick up a game--$.55 a mile, if I picked up the game, why wouldn't I? It usually helped increase my refund/reduce my tax payment quite a bit.

This year, I only made $500. I won't even get a 1099 (they don't do it unless it is $600). My mileage totals out to $285, and my other expenses are $150 total (insurance and a class I have to take). So my total expenses are $435, on a revenue of $500.

When does it become a hobby business? Do I have to show a profit a number of years in a row? Does it have to be over a certain dollar figure?

I'd ask taxAct or turbotax, but we're holding off on filing until we get everything together. Between my wife and I, we had 6 different employers this year and we're still missing a couple documents.

I am not an expert but from my reading of the IRS website a few years ago, you don't need to worry about it being deemed a hobby business until you claim a LOSS for 3 years in a row. My wife's part-time equine massage business has most of its profits offset by the $0.55 travel rate like you do, and she has only $50-$500 in profit each year. If you're still claiming a profit of $65 for the year, I wouldn't expect there to be any issues. The gov't only gets cranky when you use a business to intentionally create a 'loss' and milk the system, hence the claim that doing so for more than 3 years gets it dinged as a hobby and you can't claim the losses any more.

Profit 3 out of 5 years is the generic IRS rule of thumb for being a legitimate business. There are of course many exceptions (tree farming, you can go for decades without a profit). As a business venture you can write off (or not) the various expenses.

For a hobby, you can only write off expenses to the limit of the profit you make. So if your expenses were $500, but you made $40, you can only write off $40 of that $500.

The IRS doesn't care how much profit you make as a referee. As long as the numbers appear reasonable and everything in your life sorta matches up, you're not going to run into problems.

So some years when the wife is busy making money as a waterman, we write off lots of things. Other years when she makes hardly anything, we don't write off nearly as much. For her, the objective is to (1) stay profitable in the IRS eyes so she never becomes classified as a hobby to them, and (2) to hold as a pocket draw the ability to write off tremendously on a year when we/she really need it.

Btw, once the IRS classifies your activity as a hobby, it's essentially irrevocable. Don't let that happen if it really matters to you.

I've been in business 7 years, and never once turned a profit. I asked our accountant about the whole 5-year thing last year(after our 5th year of taxes) and he told me not to worry about it, that there are other factors which come into play.

That, and the fact I can call/email whenever I get any questionable requests from the IRS & they take care of it, all make the $200/year worthwhile.

Thanks for the explanations.

It really doesn't matter if it is a hobby or not (really, it is a hobby--I wouldn't do it without the money, but I don't do it for the money) from my perspective, but it is fairly expensive every few years to keep up with it (new equipment, seminar/class expenses, etc.)

I had a couple years where I was driving what seemed like a ridiculous amount of miles for it, but in reality I picked up games that I just happened to be in the area; or I had 3 years in a row of equipment purchases that were fairly hefty. Back then it was one of my only sources of income though.

well,

are you doing your own taxes? plug the numbers into turbotax after everything else is done and see what it does for you. does it make your payment less or refund more? if so it makes sense to claim it, since you can use those deductions.

i have to claim everything because i've got a real business and i get 1099'ed, so every last receipt counts toward helping get a bigger return out of the taxes my wife had withheld through the year. i end up fudging stuff to the benefit of the IRS to show more profit and get less back so i have less audit risk. i always have enough receipts and deductions from equipment and truck deduction/depreciation to wipe out profit entirely but don't want to look sketchy so i leave some of them in my folder.

patgizz wrote: well, are you doing your own taxes? plug the numbers into turbotax after everything else is done and see what it does for you. does it make your payment less or refund more? if so it makes sense to claim it, since you can use those deductions. i have to claim everything because i've got a real business and i get 1099'ed, so every last receipt counts toward helping get a bigger return out of the taxes my wife had withheld through the year. i end up fudging stuff to the benefit of the IRS to show more profit and get less back so i have less audit risk. i always have enough receipts and deductions from equipment and truck deduction/depreciation to wipe out profit entirely but don't want to look sketchy so i leave some of them in my folder.

Yeah, I'm doing my own taxes.

I've never fudged anything in the past (other than leaving off some cash-payment games--if they wanted to audit me though, I'm pretty sure I accounted for them by throwing a number at it anyways to the benefit of the IRS) and never including depreciation of assets. Really though, I have zero chance of an audit.

I usually do get a 1099, but this year I didn't ref enough to get it.

Well, if this group/entity has been giving you a 1099 in the past, they are keeping pretty good records and most probably reporting those records to the IRS. So even though this year you didn't get a 1099, they are likely reporting their expense to you on their returns. Just something to think about. I've been minor flagged in the past for not reporting a trivial income/expense that was reported by someone else on their returns.

Were it me, and I wanted to not risk loosing sleep, I'd report the income, write off expenses enough to nearly counter it (keep a whopping profit of a few bucks), and be done with it.

And as patgizz suggested, play with Turbotax or whomever's you are using. You can duplicate your records and then play with different scenarios at the same time. It's very enlightening to do this. Some things can make a substantial difference, but a lot of them really don't.

Ill be reporting it exactly as it is. I might not have reported all of my mileage if it would change it to a hobby status, but even with the mileage I'm showing a profit of over $100.