You may be planning to start a business after you retire, but it’s important to know whether your venture is a true profit-making operation or just a hobby, The Washington Post reports.
“It’s always been important to determine whether an activity is a business or a hobby because, by law, hobby income is taxable, but you can’t deduct losses,” says Eric Smith, a spokesman for the Internal Revenue Service.
If it is truly a business, you need to keep accurate, complete financial records in order to deduct losses, Smith says.
A lot has changed this tax season, specifically what taxpayers’ can deduct. Changes under the 2017 Tax Cuts and Jobs Act mean knowing the difference between a hobby and a legitimate profit-making enterprise is crucial. In the past, hobby expenses could be claimed as part of a class of miscellaneous itemized deductions that needed to exceed 2% but that class of deductions has been eliminated.
“There have been many tax court cases over the years where what are really hobby losses are being claimed as business losses,” Smith says. “But if an activity is truly a business, eligible taxpayers should take advantage of any legitimate deduction or credit the law allows.” Read the full story.