What’s the Gig Deal?
What’s the Gig Deal? The number of people working “gig” jobs, such as food delivery and driving for ride-sharing services, certainly seems to have gone up during this time of…
January 21st, 2020
The importance of communicating with your client in the area of hobby vs. activity engaged in for profit (a.k.a. a business) is always important, but is especially so during the TCJA years. The main reason for the concern involves expenses; while an activity engaged in for profit can produce deductible losses, hobby expenses are limited to hobby income and a reasonably and consistently allocated cost of goods sold. Thanks to TCJA, the rest of the hobby expenses, which prior to 2018 would have been allowed up to the amount of income as miscellaneous itemized deductions, are not allowed during the TCJA years.
With this framework in mind (and using the brilliance of Meredith Wilson’s The Music Man to illustrate the point), let’s imagine a new client walks into your River City office…
You welcome the potential new client, Professor Harold Hill. You will play the part of Marcellus Washburn, a River City Tax Professional.
Marcellus: “Prof. Hill, you mentioned that you are a band leader. We need to determine if your activity is a business or hobby.”
Prof. Hill: “Well, we got trouble, my friend. We got trouble right here in River City. It start with ‘P’ and it rhymes with ‘T’ and it stands for Pool!”
Marcellus: “I’m more concerned that we (you) don’t have trouble right down in DC city with the Feds!!”
Prof. Hill: “Go on my friend and tell me how I can avoid potential malfeasance regarding my business incongruities!”
Marcellus: “Let’s begin by reviewing the Nine Factors and we’ll do these one at a time:
Prof. Hill leaves your office after you tell him that you’ll be in touch after he drops off his past records and ‘credentials.’ You find yourself saying “Shipoopi!”
Some commentary about our little “play:”
Practitioner Planning Tip: Just because the bottom line result is a loss does not mean the activity doesn’t rise to the level of a trade or business. As a starting point to your discussion, look at the outcome BEFORE depreciation, Section 179 and/or Bonus Depreciation. You may find the activity is profitable and these accelerated depreciation alternatives which exist today may just be causing a timing difference.
I would also add a question asking if the activity is conducted with continuity and regularity.
In addition, I want you to think about this. Could a positive outcome result from determining the activity is, in fact, a hobby? I will say yes, and facts and circumstances could save your client self-employment tax on a profitable activity that doesn’t rise to the level of being engaged in for profit. We’re not just talking about hobby rules with activities losing money. Profitable activities could be hobbies as well. Facts and circumstances, my friends.
If you’re just not sure about your client, you can ask the IRS to delay the three out of five rule by filing Form 5213, Election to Postpone Determination as to Whether the Presumption Applies That an Activity Is Engaged in for Profit, and execute a waiver of the statute of limitation. The election on Form 5213 is filed separately from the individual tax return. I will tell you, I’ve never filed one of these forms and have chosen instead to rely on communication and to document the facts and circumstances of the case.
You may find more information on this topic in section 1.183-2 (b) of the Federal Tax Regulations.
Publication 535, Business Expenses
Publication 17, Your Federal Income Tax for Individuals
Small Business, Self-Employed, Other Business
So what did you conclude about Prof. Hill and his band leader activity? Is he engaged in the activity for profit or is it a hobby? How about giving us your take on our Facebook page?
Would you change your mind next year if Prof Hill comes in, smitten by the love of Marion the Librarian and has settled down to a quiet life in River City, selling musical instruments from a store front and leading a marching band?
I love musicals…
by Tom O’Saben, EA
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