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Turning Your Hobby Into a Business

You’ve loved dogs all your life so you decide to start a dog training business. Turning your hobby into a business can provide tax benefits if you do it right. But it can create a big tax headache if you do it wrong.

One of the main benefits of turning your hobby into a business is that you can deduct all your qualified business expenses, even if it results in a loss. However, if you don’t properly transition your hobby into a business in the eyes of the IRS, you could be in line for an audit. The agency uses several criteria to distinguish whether an activity is a hobby or a business. Check the chart below to see how your activity measures up.

The business-versus-hobby test

If your dog training business (or any other activity) falls under any of the hobby categories on the right side of the chart, consider what you can do to meet the business-like criteria on the left side. The more your activity resembles the left side, the less likely you are to be challenged by the IRS.

On the other hand, if you determine that you’re really engaged in a hobby, there are still some tax benefits to be had. You can treat hobby expenses as a miscellaneous itemized deduction on a tax return, but generally not more than hobby income. They can be used to reduce taxable income if they and other miscellaneous expenses surpass 2 percent of your adjusted gross income.

If you need help to ensure you meet the IRS’s criteria for businesslike activity, reach out to schedule an appointment.

Reminder: Second Quarter Estimated Taxes Are Due- Now is the time to make your estimated tax payment

If you have not already done so, now is the time to review your tax situation and make an estimated quarterly tax payment using Form 1040-ES. The second quarter due date is now here.

Due date: Tuesday, June 15, 2021

You are required to withhold at least 90 percent of your 2021 tax obligation or 100 percent of your 2020 tax obligation.* A quick look at your 2020 tax return and a projection of your 2021 tax obligation can help determine if a payment is necessary. Here are some other things to consider:

  • Avoid an underpayment penalty. If you do not have proper tax withholdings during the year, you could be subject to an underpayment penalty. The penalty can occur if you do not have proper withholdings throughout the year.
  • W-2 withholdings have special treatment. A W-2 withholding payment can be made at any time during the year and be treated as if it was made throughout the year. If you do not have enough to pay the estimated quarterly payment now, you may be able to adjust your W-2 withholdings to make up the difference.
  • Self-employed workers need to account for FICA taxes. Remember to account for your Social Security and Medicare taxes, as well as your income taxes. Creating and funding a savings account for this purpose can help avoid a possible cash flow hit each quarter when you pay your estimated taxes.
  • Don’t forget state obligations. With the exception of a few states, you are often also required to make estimated state tax payments if you’re required to do so for your federal taxes. Consider conducting a review of your state obligations to ensure you also comply with these quarterly estimated tax payments.

* If your income is over $150,000 ($75,000 if married filing separate), you must pay 110 percent of your 2020 tax obligation to avoid an underpayment penalty.

Don't Lose Your Refund!

The tax filing due date often brings a sigh of relief to most taxpayers. Unfortunately, every tax day also closes the window on the ability to claim a refund. According to the IRS, in 2017 up to 1.4 million individuals representing $1.35 billion in unclaimed refunds had this money turned over to the U.S. Treasury this past tax day.

As unlikely as this sounds, losing a refund could happen to you or someone you know.

The Causes

You may be due a refund beyond your tax liability. While most tax credits can be used to reduce your tax liability down to zero, there are a few credits that allow you to receive money beyond the amount of your tax liability. The most common examples of these refundable credits are the Earned Income Tax Credit, the American Opportunity Tax Credit and the Child Tax Credit. Taxpayers often fail to take advantage of these refundable credits because they assume since they owe no tax they are not entitled to a refund.

Part-time workers often lose refunds. Students and part-time workers are often the innocent victims of employer payroll systems. Payroll systems might assume you are working full-time and withhold pay from your wages at too high a rate. While some part-time workers may owe no tax, these excess withholdings are only returned to you in the form of a refund when you file a tax return.

Seniors can also be victims. The same situation happens to seniors that have money withheld from their retirement fund disbursements and Social Security checks. Their income is often low enough to not require filing a tax return. When withholdings are involved, the non-filing of a tax return could lead to a lost refund.

Death and disability create tax-filing confusion. When the person who normally organizes and files taxes for the family becomes disabled or passes away, there’s a possibility that timely filing of tax returns gets missed.

I need to be perfect. A number of taxpayers do not file on time because they are missing a piece of information. The dilemma of needing to be 100% accurate before filing your tax return can be debilitating. This concern often creates non-filed tax returns and lost refunds.

Economic impact payment confusion. With multiple rounds of stimulus checks approved by Congress, it can be difficult to keep track of them to ensure you receive your payments and that the payment amounts are correct. This is especially true if you do not normally have to file a tax return.

What you can do

You have three years. You have the later of three years from the original filing due date or two years from the time you paid any tax to claim your refund or file an amended tax return. This timeline is strictly enforced by the IRS. If you miss the deadline by even one day, you could be out of luck. For most of us this means tax years 2018, 2019, and 2020 are still open for refund requests by filing a tax return or amending a tax return filed in error.

Non-filer double check. If you did not file a tax return because you did not think it was necessary, conduct a review of your W-2’s, 1099’s and other documentation. If there is money withheld, ask for assistance to see if a refund is possible.

Check out the Recovery Rebate Credit. If you did not receive economic impact payments, and did not file a tax return, the IRS offers free options to prepare and file information to receive payment on how to file at

Thankfully, there are a few exceptions to these deadlines for bad debt, worthless securities, and for those unable to manage their financial affairs. But do not count on this as a fall back. If you had money withheld or if your tax return filing is not current, you could possibly be a victim of lost refunds. Now is the time to take action for 2018 thru 2020.

A Letter from the IRS!- What steps you should take

You got a letter from the IRS! Pulses quicken, there is a slight hesitation prior to opening the envelope, and stress levels go up. But is the letter always right?

Forced to Withdraw from Retirement Accounts?!?!?- What you need to know

Required minimum distributions are back in play. Here is what you need to know well before you reach retirement age.

Who Pays What?

With all the chatter about who is paying what in federal income taxes, wouldn’t it be nice to know what the IRS statistics say they collect? Here are the facts.

What's New in 2021

Here are major tax changes for 2021.

Adjust to Pandemic Rule Rollbacks

It’s hard to believe a little over a year ago the COVID 19 pandemic hit everyone. As things slowly turn back to normal, you need to be ready for the normalizing of the tax rules and adjusting to new ones. Here is how you can be prepared.

Required minimum distributions. If you are age 72 or older, you must once again plan to take the minimum required distribution from your retirement account in 2021. The one-year waiver of this required distribution is now over.

Penalty-free distributions from retirement accounts. While penalty-free distributions from retirement accounts is still available for those in presidentially declared disaster areas, the distribution benefit for pandemic related reasons is expiring. Remember, if you had to make withdrawals you will need to pay income tax on the distributions unless you repay the funds in a timely manner.

Unemployment taxation. Federal unemployment benefits continue to be extended through various federal spending programs. Late breaking rules make $10,200 of last year’s unemployment benefits tax-free on most federal tax returns. But that doesn’t mean you won’t be taxed on these benefits this year. If there are not withholdings from these payments, you may be required to send in estimated tax payments.

Businesses need to stay alert. While the original PPP loan program is now in forgiveness mode, there are new loans and active programs to help cover the cost of employees affected by the pandemic. The best course of action is to stay aware of ever-changing federal and state landscape.

Rules and benefit programs relating to the pandemic are not over. But as social distancing rules adjust, so too must you to the changing tax law landscape.

Thinking of Selling Your Home?- Hot housing market requires tax knowledge

With housing prices skyrocketing, more homeowners are considering cashing out to multiples over list price! Especially since one of the largest tax breaks available to most individuals is the ability to exclude up to $250,000 ($500,000 married) in capital gains on the sale of your personal residence. Making the assumption that this gain exclusion will always keep you safe from tax can be a big mistake. Here is what you need to know.

The rule’s basics

As long as you own and live in your home for two of the five years before selling your home, you qualify for this capital gain tax exclusion. In tax-speak you need to pass three hurdles:

  • Main home. This tax term defines what a main home is. It can be a traditional home, a condo, a houseboat, or mobile home. Main home also means the place of primary residence when you own two or more homes.
  • Ownership test. You must own your home during two of the past five years.
  • Residence test. You must live in the home for two of the past five years.
  • Other nuances.
    • You can pass the ownership test and the residence test at different times.
    • You may only use the home gain exclusion once every two years.
    • You and your spouse can be treated jointly OR separately depending on circumstances.

When to pay attention

You have been in your home for a long time. The longer you live in your home, the more likely you will have a large capital gain. Long-time homeowners should check to see if they have a capital gains tax problem prior to selling their home.

You have old home gain deferrals. Prior to the current rules, home-gains could be rolled into the next home purchased. These old deferred gains reduce the cost of your current home and can result in a capital gains exposure.

Two homes into one. Newly married couples with two homes have potential tax liability as both individuals may pass the required tests on their own property but not on their new spouse’s property. Prior to selling these individual homes, you may wish to create a plan of action that reduces your tax exposure.

Selling a home after divorce. Property transferred as a result of a divorce is not deemed a sale of your home. However, if the ex-spouse that retains the home later sells the home, it may have an impact on the amount of gain exemption available.

You are helping an older family member. Special rules apply to the elderly who move out of a home and into assisted living and nursing homes. Prior to selling property, it is best to review options and their related tax implications.

You do not meet the five-year rule. In some cases you may be eligible for a partial gain exclusion if you are required to move for work, disability, or unforeseen circumstances.

Other situations. There are a number of other exceptions to the home gain exclusion rules. This includes foreclosure, debt forgiveness, inheritance, and partial ownership.

A final thought

The key to obtaining the full benefit of this tax exclusion is in retaining good records. You must be able to prove both the sales price of your home and the associated costs you are using to determine any gain on your property. Keep all sales records, purchase records, improvement costs, and other documents that support your home’s capital gain calculation.

Navigating the New 2021 Child Tax Credit- What you need to know

The Child Tax Credit is significantly different for 2021, but just for 2021…for now. Read on…