Do I have a hobby or a buisness?

Do you have a hobby or a business?  If the activity is done mainly for recreation or pleasure, it is a hobby.  However, there are other factors to consider when making the determination if you have a hobby or a business.  The IRS has 9 questions to use to make the determination:

• Is the activity carried out in a businesslike manner and with maintained complete, accurate books and records?
• Does the time and effort you put into the activity indicate you intend to make it profitable? Do you depend on income from the activity for your livelihood?
• Are the losses due to circumstances beyond your control (or are normal in the startup phase of your type of business)?
• Do you change your methods of operation in an attempt to improve profitability?
• Do you or your advisors have the knowledge needed to carry on the activity as a successful business?
• Were you successful in making a profit in similar activities in the past?
• Does the activity make a profit in some years and how much profit does it make?
• Do you expect to make a future profit from the appreciation of the assets used in the activity?

If you answer yes to those 9 questions, congratulations, you have a business!  You will file the income and expenses on Schedule C with your tax return.  

However, if you answer no to any of the questions, you have a hobby.  You must report the income from the hobby on your tax return.  Unfortunately with the TCJA, expenses are not deductible for hobbies until the year 2025.  

My advice is to take your hobby and turn it into a business.  This way you will be able to deduct your expenses and losses.  Just remember the 9 questions listed above and make it a legitimate business.

Candace Stevens, CEO/President of

Number Cruncher LLC

cstevens@numbercruncherllc.tax

www.numbercruncherllc.tax

How are IRS Audits carried out?

IRS Audits are conducted in two ways:

🌟By Mail
🌟In-Person



If the audit is conducted by mail, the taxpayer will receive a notice from the IRS called CP 2000.  A CP 2000 is a detailed letter stating the differences between what the tax return shows and what information the IRS has as well as the proposed changes.  This letter will show any corrections the IRS made to the original return as well as the recalculation of the tax liability.  The CP 2000 will explain what a taxpayer is to do if they agree or disagree with the proposal.

A taxpayer must respond to the IRS by the due date shown on the CP 2000 notice or else the IRS will consider the changes correct.

If the audit is conducted in person, the IRS will notify the taxpayer that their return has been selected for review.  The taxpayer will also be told what information to have available.

The IRS generally conducts an audit where the books or records are located.  However, the audit can be held at the taxpayer's home, place of business, an IRS office, or at the office of the taxpayer's accountant, enrolled agent or attorney.

A taxpayer may:
*Represent themselves
*Have someone accompany them to support their position or be a witness to the proceedings *Accompany someone who will represent the taxpayer (this person must be an accountant, enrolled again, attorney, enrolled actuary or the person who prepared the return and signed it as the preparer)
*Have their representative act for them not be present.

In the opening conference, the examiner will explain why the taxpayer was selected for audit and explain the audit plan.

This type of audit usually concludes with a closing conference.  The taxpayer will receive a letter from the IRS explaining if the return is accepted as filed or not accepted as filed.  The IRS will explain any proposed changes if it is not accepted.  If the taxpayer does not agree with the changes, they may appeal.

It is important that taxpayers open and read letters that are received from the IRS.  Ignoring the letters will not make the problem go away, it will actually make the issue worse.

Candace Stevens, CEO/President of

Number Cruncher LLC

cstevens@numbercruncherllc.tax

www.numbercruncherllc.tax

How is a tax return selected for an audit?

Audit!  This word strikes fear into everyone, even me.  My heart beats a little faster whenever I receive a letter from the IRS, even when I know I am going to receive a letter for just changing my mailing address.

Not all IRS Audits turn out bad.  Sometimes there aren't any changes and in some cases, the taxpayer will receive a REFUND!

Historically about 1% or less of tax returns are selected for audit.

Below is a list of how tax returns selected for audit.

🏁-The IRS screens tax returns using Discriminant Index Function, which is a data analytics program.  The program assigns each tax return a numeric score.  There is a high potential that if a return is selected because of a high score, that there will be a change to the taxpayer's income tax liability.

🏁-Information sent into the IRS by 3rd parties, ie W-2's and 1099's, does not match the information on the tax return.

🏁-There may be a questionable treatment of an item on the tax return.

🏁-The IRS may receive tips from outside sources on potential noncompliance with the tax laws or inaccurate filing.  The source of these tips can come from individuals, newspapers or public records.

Being proactive will lessen the chances of being audited.  Preparing a tax return correctly will limit the possibility of being audited.  ALWAYS keep a copy of all the documentation used to prepare a tax return, even all those pesky receipts.

Candace Stevens, CEO/President of

Number Cruncher LLC

cstevens@numbercruncherllc.tax

www.numbercruncherllc.tax

Employee VS Contractor

Is the person working for you an Independent Contractor or an Employee? This subject definitely takes some digging into.  If you classify your workers wrong, it could cost you.  Let's take a look at the differences between Independent Contractor and Employee so this doesn't happen.  

Independent Contractor:  business owners, no taxes are withheld from pay, they decide their work hours, have a business to business relationship with their clients, usually submit invoices for the work that is done, they work for many different people, and use their own equipment and supplies. 

Employee:  The boss defines work hours, your employment with them is long term, you only work for one company, the employer provides the supplies or equipment and taxes are withheld from the pay.  

The IRS has 3 tests to use to determine if the relationship you have with your workers is an Independent Contractor or an Employee:  Financial Control, Behavioral Control, and Type of Relationship.

1.  Financial Control:  

Independent Contractors are usually paid a flat fee for projects or jobs.  Independent Contractors use their own tools, equipment, and supplies.  They are not reimbursed for expenses that they incur for the project, and Independent Contractors pay self-employment tax. 

Employees are usually a guaranteed company wage or salary.  

2.  Behavioral Control:  

An Independent Contractor sets his own hours and decides how and when he will get the job done.  You are only in control of the result of their work.

Employee:  You set the work hours, dictate how the work is to be done and what work they are to do.  

3. Type of Relationship:

If the person working for you is only a short term contract, does a specific project for your company and pays for their own benefits, they are an Independent Contractor.  

If the person working for you does core work for your company, plan on working for you for a long time and offer them benefits, they are an Employee.

At the end of the year and Independent Contractor, receive's a 1099-Misc, and Employee receives a W-2.

If you still are confused,  click the link below to be taken to a page on the IRS.gov site that has more explanation.  Feel free to contact us if you would like to visit about this 

https://www.irs.gov/businesses/small-businesses-self-employed/independent-contractor-self-employed-or-employee

Candace Stevens, CEO/President of

Number Cruncher LLC

cstevens@numbercruncherllc.tax

www.numbercruncherllc.tax

Is my Suit Considered Work Clothes?

What can and cannot be deducted as Work Clothes, is very confusing.  This blog will hopefully clear up the confusion that surrounds the topic of deductable Work Clothes.

Let's start but what Work Clothes are not.  I am sorry to say but street clothes are not considered deductible Work Clothes.

What are street clothes?

Street Clothes are clothes you can wear anywhere, anytime, outside of work.  This includes Suits, Work Dresses, Bibs,  Overalls, White Shirts, Ties, Socks, Nylons, Shoes, and Jewelry.

You can't just buy clothes you wear to work and still deduct them.  The IRS takes the stance that you could wear them outside of work.

Work Clothes must be mandatory for your job, distinctive and unsuitable for everyday wear to claim the deduction.  Work Clothes must be Ordinary and Necessary for the industry.

Scrubs and uniforms for police officers, firemen, pilots, and stewardess are a few examples of Work Clothes that are deductible.

It is a good idea to keep a copy of your employer's policies to help substantiate the expenses. And by all means, save your receipts!!!  Musicians and entertainers can deduct clothing they wear on stage that is not suitable to wear every day.


A general contractor can deduct the costs of hard hats, boots, gloves or protective clothing.

Work Clothes that are promotional clothing can be deducted but they must have the logo on them.  the cost of the clothing item and the expense of adding the logo are deductible.

I hope this blog helps to clear up what Work Clothes are considered deductible.  If you have any questions about Work Clothes or any other tax questions, please feel free to contact me.

Keep Smiling.

Candace Stevens, CEO/President of

Number Cruncher LLC

cstevens@numbercruncherllc.tax

www.numbercruncherllc.tax

Should I use the Home Office Deduction Part 2

In the last blog, I informed you of the requirements needed to use the Home Office Deduction.   This blog will inform you of how to calculate the Home Office Deduction.

There are two ways to figure the Home Office Deduction, the simplified square footage calculation of the percentage of your home used for business. There are special rules for using your home as a daycare, but I will not discuss these in this blog.

Percentage of Your Home Used for Business Calculation

To figure the business percentage of your Home Office, divide the total area of the office space by the total area of the house, excluding an attached garage.  It can be a bit of a pain to acquire all the measurements, but you will only have to do it once.

For example, the office measure 175 square feet and the house measure 1300 square feet.  The business percentage would be 13%  (175 divided by 1300 equals .13).

The Home Office Deduction would be 13% of all household expenses paid for during the year.

Simplified Square Footage Calculation

If the rooms in your home are all about the same size, the business percentage can be figured by dividing the number of rooms used in your business by the total number of rooms in the house.

For Example, your house has 7 rooms and one room is used exclusively for business, the business percentage would be 14% (1 divided by 7 equals .14).

The Home Office Deduction would be 14th of all household expenses paid for during the year.

There are two types of expenses that you can deduct for the Home Office Deduction, Direct Expenses, and Indirect Expenses.

Direct expenses are expenses for the repair or maintaining the office space.  Examples include painting the office, a 2nd telephone line into the office and long-distance business calls.

Indirect Expenses are part of the costs of running the Home Office.  this is where the business percentage comes into play.

In our first example, we figured the Home Office took up 13% of the house, so 13% of the following can be deducted:

Homeowners insurance
Utilities
HOA fees
Security
General repairs and maintenance
Mortgage interest
Property taxes
Rent or if you own your home
Depreciation

Keep in mind that if you sell your home for a profit you will have to pay a capital gains tax on the total amount of the depreciation deductions.  But despite this, taking the Home Office Deduction will benefit you.

If you qualify to take the Home Office Deduction, it's yours, you might as well take it instead of paying higher taxes.

I hope this blog answered some of your questions about the Home Office Deduction.  If you have any questions about the Home Office Deduction or any other tax questions, please feel free to contact me.

Candace Stevens, CEO/President of

Number Cruncher LLC

cstevens@numbercruncherllc.tax

www.numbercruncherllc.tax

• 
  

Should I Use the Home Office Deduction?

If you own a business and meet the requirements set by the IRS, you definitely should use the Home Office Deduction on your tax return.  Using the Home Office Deduction has gotten a bad rap somewhere and taxpayers are afraid to use it because they are worried it will trigger an audit.  Taking the Home Office Deduction generally will not trigger an audit.  There were changes made in the late 1990s which made it easier for taxpayers who work at home to qualify for these write-offs.

To qualify to use the Home Office Deduction, IRS Publication 587 states the office must be:

*Exclusively and regularly as your principal place of business 

*Exclusively and regularly as a place where you meet or deal with patients, clients, or customers in the normal course of your trade or business;

Exclusive Use:

A portion of your home must be used exclusively and regularly for your business.  It can be an office in a separate room or group of rooms.  The Office can be sectioned off in a room, as long as there is a clear division and you need to be able to prove that personal activities are excluded from the business section.

The IRS is very serious about the Exclusive-Use.  If you do crafts or any personal work in your office, you cannot use the Home Office Deduction.  However, this doesn't mean that no one but you and your clients can come into the office to visit with you for a few minutes.  As long as your personal activities do not invade your home office any more than they are permitted at an office building, you are ok.

Regular Use:

There isn't a clear definition of what constitutes regular use.  Keep these tests in mind:

*If you use a room only occasionally and the use is incidental to your business, this would not be Regular Use.

*Use the Home office a few hours or so each day.

*If the IRS challenges this, they use the above two circumstances in each case.

Principal Place of Business:

There are two requirements for this test:

*It is the principal location of your business or

*It is where you regularly meet with customers or clients.  

Now you know how to claim the Home Office Deduction.  In the next blog, we will look at how to calculate the Home Office Deduction.

Candace Stevens, CEO/President of

Number Cruncher LLC

cstevens@numbercruncherllc.tax

www.numbercruncherllc.tax