Business or Hobby?

More and more people are self-employed, and the IRS is watching. Here's what they're looking for:

 

If you're newly self-employed, filling out your tax return can be a whole new adventure. Now is the time to start sorting things out. Is it a business or a hobby? Be careful there:

You DO have to report all income from a hobby. The good news is that you can deduct expenses of the hobby, just not losses.

If you report it as a business, you have to prove you made a legitimate effort in order to deduct any losses. You'll need a business plan, a separate bank account, and organized records of income and expenses.

Also, be careful about any square footage you declare as a home office. An IRS agent may come knocking, and will look around, measure, take pictures, and determine whether it's set up exclusively for business.

Source: Martin S. Kaplan, author of "What the IRS Doesn't Want You to Know"