It’s important to know whether your venture is a true profit-making operation or just a hobby. By Michelle Singletary Michelle Singletary Personal finance columnist Email Bio Follow Columnist April 8 at 7:11 AM You may be planning to start a business after you retire from your 9-to-5 job, but it’s important to know whether your venture is a true profit-making operation or just a hobby.
“In the past, you could claim hobby expenses as part of the class of miscellaneous itemized deductions that needed to exceed 2 percent of adjusted gross income,” Smith said. “But that category of deductions was eliminated under tax reform.” There is an exception to this rule. If you’re involved in the breeding, training, showing or racing of horses, you must show a profit in at least two of the last seven tax years, including the current year.
The following questions can help you and the IRS determine whether a venture is a business or a hobby.— Are you maintaining complete and accurate financial records?— Do you depend on income from the venture for your livelihood?— Do you have the knowledge and skills that can help your enterprise be successful?— Has your venture made a profit in some years and if so how much?
Here’s the bottom line from the IRS: “If you do not carry on your business or investment activity to make a profit, you cannot use a loss from the activity to offset other income.”What to do with your tax refundHave you been successful creating a stream income in retirement from a business activity? What tips can you share for other aspiring entrepreneurs in the second half of their lives? Send your comments to colorofmoney@washpost.com.
Bev from Pagosa Springs, Colo., wrote, “I’m close to retirement and realizing that my husband and I may need to sell our home and rent. First, the upkeep is more than we can do ourselves as well as repairs. Next, the raise in insurance and in taxes this year is putting affordability higher than what retirement income can handle. On the other hand, we bought this home four years ago and will make between 35 percent to 40 percent return on our investment.