Tax

Millions of people enjoy hobbies such as stamp or coin collecting, craft making, and horse breeding, but the IRS may also consider them a source of income. As such, if you engage in a hobby that provides a source of income, you must report that income on your tax return; however, taxpayers (especially business owners) should be aware that the way income from hobbies is reported is different from how you report income from a business. For example, there are special rules and limits for deductions you can claim for a hobby.

Here are five basic tax tips you should know if you get income from your hobby:

Business versus Hobby. There are nine factors to consider to determine if you are conducting business or participating in a hobby. Make sure to base your decision on all the facts and circumstances of your situation. To learn more about these nine factors, please call.

Allowable Hobby Deductions. You may be able to deduct ordinary and necessary hobby expenses. An ordinary expense is one that is common and accepted for the activity. A necessary expense is one that is helpful or appropriate. Don’t hesitate to call if you need more information about these rules.

Limits on Expenses. As a general rule, you can only deduct your hobby expenses up to the amount of your hobby income. If your expenses are more than your income, you have a loss from the activity. You can’t deduct that loss from your other income.

How to Deduct Expenses. You must itemize deductions on your tax return in order to deduct hobby expenses. Your costs may fall into three types of expenses. Special rules apply to each type. Use Schedule A, Itemized Deductions to report these types of expenses.

Use a tax professional. Hobby rules can be complex, but using a tax professional makes filing your tax return easier. If you need have any questions about reporting income from a hobby, please call.

• By Leon Clinton
• October 25, 2016

Keeping good records is essential for every business owner no matter how small. But whether it’s keeping track of mileage, documenting expenses, or separating personal from business use, keeping up with paperwork is a seemingly never ending job.

No matter how good your intentions are in January, the chances are good that by summer that mileage log is looking a bit empty. Even worse, you could be avoiding tracking your mileage altogether–and missing out on tax deductions and credits that could save your business money on your tax return.

The good news is that if you’re tech savvy, there are a number of phone applications (apps) that could help you track those pesky business miles–and ditch the paper once and for all.

Most of these apps are useful for tracking and reporting expenses, mileage and billable time. They use GPS to track mileage, allow you to track receipts, choose the mileage type (Business, Charitable, Medical, Moving, Personal), and produce formatted reports (IRS compliant HTML and CSV tax return reports) that are easy to generate and share with your CPA, EA, or tax advisor.

Here are three popular apps that help you track your business mileage:

1. TripLog – Mileage Log Tracker

Works with: Android and iPhone

What it does: Tracks vehicle mileage and locations using GPS

Useful Features:

Automatic start when plugged into power or connected to a Bluetooth device and driving more than five mph
Reads your vehicle’s odometer from OBD-II scan tools
Syncs data between the web service and multiple mobile devices
Supports commercial trucks including per diem allowance, state-by-state mileage for IFTA fuel tax reports, and DEF fuel purchases and gas mileage
2. Track My Mileage

Works with: Android and iPhone

What it does: Keeps track of mileage for business or personal use

Useful Features:

Provides mileage rates used to calculate the deductible costs of operating your automobile
Associate and group trips by client
Multiple driver and vehicle tracking
Localized and translated into more than 20 languages
3. BizXpenseTracker

Works with: iPhone and iPad

What it does: Tracks mileage, as well as expenses and billable time

Useful Features:

Allows you to choose which way you want to track your mileage
Remembers Frequent trips
PDF format or CSV for importing into Excel
Email your reports and photo receipts
Call the office today if you have any questions about using apps that track business mileage or need help choosing the right one for your business needs.

• By Leon Clinton
• October 19, 2016

Lending money to a cash-strapped friend or family member is a noble and generous offer that just might make a difference. But before you hand over the cash, you need to plan ahead to avoid tax complications for yourself down the road.

Take a look at this example: Let’s say you decide to loan $5,000 to your daughter who’s been out of work for over a year and is having difficulty keeping up with the mortgage payments on her condo. While you may be tempted to charge an interest rate of zero percent, you should resist the temptation.

Here’s why:

When you make an interest-free loan to someone, you will be subject to “below-market interest rules.” IRS rules state that you need to calculate imaginary interest payments from the borrower. These imaginary interest payments are then payable to you, and you will need to pay taxes on these interest payments when you file a tax return. To complicate matters further, if the imaginary interest payments exceed $14,000 for the year, there may be adverse gift and estate tax consequences.

Exception: The IRS lets you ignore the rules for small loans ($10,000 or less), as long as the aggregate loan amounts to a single borrower are less than $10,000, and the borrower doesn’t use the loan proceeds to buy or carry income-producing assets.
As was mentioned above, if you don’t charge any interest, or charge interest that is below market rate (more on this below), then the IRS might consider your loan a gift, especially if there is no formal documentation (i.e. written agreement with payment schedule), and you go to make a nonbusiness bad debt deduction if the borrower defaults on the loan–or the IRS decides to audit you and decides your loan is really a gift.

Formal documentation generally refers to a written promissory note that includes the interest rate, a repayment schedule showing dates and amounts for all principal and interest, and security or collateral for the loan, such as a residence (see below). Make sure that all parties sign the note so that it’s legally binding.

As long as you charge an interest rate that is at least equal to the applicable federal rate (AFR) approved by the Internal Revenue Service, you can avoid tax complications and unfavorable tax consequences.

AFRs for term loans that is, loans with a defined repayment schedule, are updated monthly by the IRS and published in the IRS Bulletin. AFRs are based on the bond market, which changes frequently. For term loans, use the AFR published in the same month that you make the loan. The AFR is a fixed rate for the duration of the loan.

Any interest income that you make from the term loan is included on your Form 1040. In general, the borrower, who in this example is your daughter, cannot deduct interest paid, but there is one exception: if the loan is secured by her home, then the interest can be deducted as qualified residence interest–as long as the promissory note for the loan was secured by the residence.

If you have any questions about the tax implications of loaning a friend or family member money, don’t hesitate to call.

• By Leon Clinton
• October 13, 2016