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Deducting expenses related to hobbies

Georgia residents who have a side activity in which they earn money may want to deduct related losses on their individual federal tax returns. If the Internal Revenue Service classifies the activity as a hobby, however, losses from the activity cannot be claimed as a deduction. In order to receive tax savings, taxpayers have to be able to verify that the intent of their business is to make a profit.

With the recent passage of the Tax Cuts and Jobs Act, it may now be even more difficult for taxpayers to claim deductions for a hobby-related enterprise. Before the legislation was passed, individuals could have deducted the expenses related to their hobby up to how much income was earned from the hobby. The expenses had to be included as part of the miscellaneous itemized deduction items.

Thanks to the TCJA, taxpayers are no longer able to write off those expenses. Taxpayers are required to report all of the revenue from their hobby-related activity and include it in their taxable income. For individuals who operate businesses that have yet to be profitable, it is important that they verify that their activity is a for-profit business instead of a hobby that generates no profit.

The IRS uses two safe-harbor rules to determine if a taxpayer is operating a for-profit enterprise. One rule requires the activity to generate a positive taxable income for a minimum of three years out of every five-year period.

An attorney who practices tax law may help a client resolve disputes with the IRS. The attorney could litigate to cease the levy of wages. Representation may also be offered for clients who are being audited. The attorney could work to have any tax audit penalties that were assessed eliminated.

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