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How new tax laws impact expense deductions

On Behalf of | Jun 8, 2018 | Audits |

As a general rule, the IRS says that Maryland residents who have side gigs that lose money are engaging in hobbies as opposed to businesses. This means that they can’t use that loss to offset any other income that they may have generated. In past years, individuals could deduct hobby expenses that were more that 2 percent of their adjusted gross income up to the amount of income the hobby generated.

This would be made as a miscellaneous itemized deduction, and it was only allowed if a person wasn’t subject to the alternative minimum tax. However, since the Tax Cuts and Jobs Act was passed, it is no longer possible to claim any expenses related to a hobby. This will be in effect until at least 2025, and it provides taxpayers with side gigs an incentive to establish these activities as legitimate businesses.

Generally, if an activity generates a profit in three out of five years, it is considered a business. Taking steps to act like a business such as keeping records or having expertise in the field may also show that an activity shouldn’t be treated like a hobby. Those who are of ordinary means are more likely in the eyes of the IRS to be attempting to make a profit as opposed to those who are wealthy.

Those who claim a deduction that they aren’t entitled to on a tax return could be selected for an audit. If a person is audited, it may be a good idea to work with a tax law professional. An attorney can often develop a justification for the actions a taxpayer took. In some cases, the government may agree with the taxpayer and accept a return as submitted.