Did Your Hobby Just Become a Business? See What the IRS Has to Say

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Have a hobby that’s become a passion? Maybe you’ve been crafting decorative wreaths to sell at local street fairs. Or perhaps you turned your love of fashion into a small side hustle, reselling thrifted treasures or styling your friends for big events.

Anytime money is exchanged for goods or services, the IRS will expect their cut. With part-time gigs becoming a more common way to generate income, here’s what you need to know from an IRS standpoint.

Defining hobby vs. business

The IRS considers a hobby any activity that’s engaged in primarily for pleasure, recreation or personal fulfillment — not for profit. But there are exceptions. For example, if you occasionally sell your homemade quilts at a yard sale and make a few bucks, it’s not typically considered taxable business income.

On the other hand, a business is an endeavor undertaken with the intention of making a profit. The key here is your intent.

You might not be profitable yet, but if your goal is to make money, the IRS may consider this a business. Other factors indicative of a business (according to the IRS) include whether or not you:

  • Maintain complete and accurate books and records
  • Put time and effort into the activity, demonstrating a plan to make it profitable
  • Depends on the income generated from the activity
  • Have been successful in making a profit in similar activities in the past
  • Expect to make a future profit

Understanding the implications

Whether it’s a hobby or business, maintaining thorough records is crucial for potential dealings with the IRS. For hobbies, keep track of any income earned, especially if you’re generating sales through a payment app. If you receive a Form 1099-K, you’ll need to report the earnings.

 For businesses, you’ll also want to record and report all income and expenses. You may also make applicable deductions. Keeping meticulous records will not only help at tax time but can also provide valuable insights into your business’s financial health. Be sure to regularly review your finances and adjust your strategies as needed.

For fun and profit?

The last thing any taxpayer wants is a surprise letter from the IRS. As your hobby grows, or if you’re considering turning your passion into something more, get up to speed with the tax implications. The experts at Magone & Co can help. For tax planning guidance, give us a call today at (973) 301-2300.

 

This document is for informational purposes only and should not be considered tax or financial advice. Be sure to consult with a knowledgeable financial or legal advisor for guidance that is specific to your tax situation. 

Cracking the Code on Seller’s Discretionary Cash Flow

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Discounted cash flow analysis? Price-to-earnings multiple? When breaking down the true value of your business, traditional valuation models consider a variety of industry metrics — but they don’t always work best for small businesses.

That’s why some valuation advisors use an alternative measure: Seller’s discretionary cash flow (SDCF).

While it’s an option, is SDCF the right metric to pin down the value of your small business? Let’s take a closer look.

Decoding SDCF

First, it’s important to consider the nature of your business. Is it simply an investment, or is it a career that provides income for you and your family? If your business is your job, SDCF could provide a more meaningful metric of what the business is worth.

One huge perk of SDCF? It captures both the return on investment and reasonable annual compensation for the owner.

Calculating SDCF begins with earnings before taxes. From there, you adjust for things like:

  • Non-operating income and expenses
  • Unusual or nonrecurring income and expenses
  • Depreciation and amortization expense
  • Interest income and expense
  • Owner’s total compensation

Be sure to document everything that matters to a potential buyer, including all discretionary expenditures.

Although they could be legitimate expenses, such as business-related meals with customers, they might not be expenses that a new owner would choose to incur. Potential buyers need to see the full picture — from the full benefits available to the approximate annual costs of these benefits.

Once a business valuation professional has calculated your SDCF, you can compare it to similar businesses that have recently sold. This will give you an approximate idea of what yours might be worth in the current market.

Putting a price tag on your business

Whether you’re looking to cash out now or planning a long-term exit strategy, a business valuation can provide a realistic calculation of your organization’s total worth. Like any small business owner, you want to ensure you’re getting top dollar for all of your business assets when the time comes.

Contact Magone & Company  today at (973) 301-2300 to learn more about our valuation services.

This document is for informational purposes only and should not be considered tax or financial advice. Be sure to consult with a knowledgeable financial or legal advisor for guidance that is specific to your unique circumstances

Forfeited FSA Balances — What’s an Employer to do?

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Under an employer-sponsored flexible spending account (FSA) plan, employees can elect to contribute a designated pre-tax amount of their annual salary to their personal healthcare FSA, dependent-care FSA or both.

For a personal healthcare FSA, the maximum amount they can contribute for the 2024 tax year is $3,200 (up from $3,050 in 2023). For a dependent-care FSA, the maximum amount is $5,000. And for a married employee, the $5,000 cap represents the highest amount that both spouses can together contribute.

But what happens to the money that isn’t used?

What you can and can’t do

Because FSAs have a strict “use it or lose it” mandate, employers have several options.

  1. You can simply keep the money
  2. If you don’t keep the money, forfeited amounts must be used to:
  • Defray expenses of administering the FSA
  • Reduce employee FSA salary reduction amounts for the following plan year
  • Add to your employees’ FSA coverage on a reasonable and uniform basis

Forfeited funds may not be returned to individual employees or donated to charity. If an employee terminates when their reimbursements for the year are greater than their contributions to that point, you may not withhold funds from their final paycheck or bill them for the difference.

 Exceptions to the rule

While the leftover balance generally reverts back to the employer, there are some exclusions:

  • An FSA plan can allow a grace period of up to two and a half months
  • A healthcare FSA plan can allow employees to carry over up to $610 of unused balances from one year to the next. (However, if the $610 carryover privilege is allowed, the healthcare FSA cannot also offer the grace-period deal.)
  • Dependent-care FSAs cannot allow the carryover privilege, but they can allow the grace period

FSA forfeitures total at least $3 billion per year. While the best-case scenario is that employees max out their funds for their own expenses, it’s important to understand your options.

 For tax planning guidance for your small business, call Magone & Company today at (973) 301-2300.

 

This document is for informational purposes only and should not be considered tax or financial advice. Be sure to consult with a knowledgeable financial or legal advisor for guidance that is specific to your tax situation.

Making Employee Financial Wellness a Priority Can Pay Off for Your Business

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After a 42-month hiatus, federal student loan payments resumed in October 2023. Impacted employees are now dealing with a new bill factored into their monthly budgets, leaving many stressed and worried.

As employers strive to support their workforce, offering benefits that help employees manage their student loan debt has become increasingly important.

More than just a paycheck

Whether you’re running an organization or working for one, most people would agree that employee financial wellness is a hot topic. A comprehensive benefits package — one that focuses on financial wellness — can help cultivate a happier, more focused and more engaged workforce that’s better prepared for retirement.

The pause on payments afforded borrowers over $260 billion in waived costs. However, the resurgence has added stress to employees’ financial situations, affecting their job performance, overall well-being and ability to make major life decisions. Younger workers, in particular, find themselves torn between repaying student loans and saving for retirement.

According to a recent study by the ADP Research Institute, about half of workers are in the process of leaving their workplace. Among workers with student loan debt, that number increases to nearly 60%.Turnover is costly, and offering the right benefits can encourage workers to stay.

Benefits for employees — and employers

By offering a retirement plan with a student loan matching program, employers can demonstrate their commitment to supporting employees in making sound financial decisions, ultimately enhancing employee retention and satisfaction.

Under the SECURE 2.0 Act, employers are enabled to match student loan payments as contributions to retirement plans, so employees can tackle debt while saving for the future. For every qualified student loan payment made by an employee, the employer may make a matching contribution to their 401(k) plan based on the amount of the loan payment.

The results?

  • Reduced student loan debt
  • A retirement savings increase (even if they’re not making contributions)
  • Compound interest as 401(k) account grows

Plus, employers get a tax benefit for their matching contributions. If certain requirements are met, employers can deduct contributions made to a qualified retirement plan on behalf of its employees. The deduction reduces an employer’s taxable income — while helping more people achieve a secure financial future.

If you have a question about retirement benefits or their tax implications, reach out to the tax experts at Magone & Company.

 

This document is for informational purposes only and should not be considered tax or financial advice. Be sure to consult with a knowledgeable financial or legal advisor for guidance that is specific to your unique circumstances.

How Tax Debt Could Impact Your International Travel Plans

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Gearing up for a summer getaway abroad? Before you head to the airport, be aware of a potential roadblock for delinquent taxpayers — passport problems.

In 2015, the Fixing America’s Surface Transportation Act empowered the IRS to inform the State Department about taxpayers with “seriously delinquent tax debts.” This information can be used to deny passport applications or renewals for individuals who owe a hefty amount to Uncle Sam. As of 2024, the “seriously delinquent” threshold stands at $62,000, including back taxes, interest and penalties.

So how can you help ensure you’re in your seat for takeoff?

Before the gate closes…

Affected taxpayers will receive written notice from the IRS outlining steps to resolve the issue.

Once the tax debt is settled, the IRS will reverse the certification within 30 days. The State Department also allows a 90-day period to make full payments or set up a payment arrangement before denying passport applications.

It’s essential to act promptly if international travel plans are on the horizon. Be sure to:

  • Pay the tax debt in full or set up a payment plan with the IRS to settle the debt in installments
  • Consider an Offer in Compromise (OIC)
  • Comply with a settlement agreement
  • Request a collection due process appeal or relief

An important reminder: The IRS will never call or email in an attempt to settle a tax debt, nor will they require payment via gift cards or other unorthodox means. Verify through official channels or contact your accountant or attorney for assistance to avoid falling victim to fraud schemes.

Departing on time

Whether you’re traveling for business or pleasure, don’t miss your flight due to delinquent taxes. By exploring these relief options and seeking guidance from a trusted tax advisor, you can navigate through challenges with a smoother landing.

Reach out to the tax experts at Magone & Company, or give us a call today at (973) 301-2300 for an evaluation of your tax situation.

 

This document is for informational purposes only and should not be considered tax or financial advice. Be sure to consult with a knowledgeable financial or legal advisor for guidance that is specific to your tax situation.

Before You File, Double Check Those Medical Bills

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According to the IRS, medical expenses include the “costs of diagnosis, cure, mitigations, treatment or prevention” of an injury or disease. And dealing with these costs can be a challenging part of life.

But what many taxpayers may not realize is that there are specific tax laws governing the deduction of certain medical expenses to help you save.

Understanding these regulations is essential to ensure you’re maximizing your tax benefits while staying compliant with the law. Here’s a rundown of the basic rules:

Flexible spending accounts (FSAs). An FSA is a tax-advantaged account offered by some employers to help alleviate qualified health-related expenses like prescriptions or eyeglasses. This type of account has a “use-it-or-lose-it” feature, so any money leftover at the end of the year will be forfeited. Keep that in mind when allocating how much to contribute for the year.

Medical and dental deductions. Medical and dental expenses that aren’t reimbursed by your insurance may be deducted to the extent your annual total exceeds 7.5% of your adjusted gross income.

To qualify for medical deductions, you must also itemize. When adding up your medical costs, be sure to include the cost of traveling to your doctor or medical facility for treatment. If you go by car, you can deduct a flat mileage rate, adjusted by the IRS each year, or you can keep track of your actual out-of-pocket expenses for gas, oil, repairs, parking and tolls.

So what’s eligible?

To make the most of your tax deductions, here’s a quick breakdown of items that you may and may not write off.

Questions about your medical deductions? Reach out to the CPAs at Magone & Company to ensure you’re on track to save.

Eligible Not Eligible
A physician-directed weight-loss program undertaken to treat obesity Meal replacements, diet foods and supplements, or a weight-loss program to maintain appearance
Treatment at a drug or alcohol clinic, a smoking-cessation program or  a prescription for nicotine withdrawal medication A doctor-recommended trip or vacation to rest or boost your mood
Acupuncture Marriage counseling
Dentures, hearing aids and orthopedic shoes Household help
Admission and transportation to a medical conference concerning the chronic illness impacting you or your family member The collection and storage of DNA (unless you can prove how DNA will be used for diagnostic testing)
Childbirth classes for a mother-to-be Maternity clothes
Teeth cleaning and orthodontia Teeth bleaching
A wig that benefits the mental health of patients suffering hair-loss from disease Hair transplants
Contact lenses and peripheral materials Retin-A for wrinkles
Nursing services at home or a care facility Home nursing services for a normal, healthy baby

 

This information is provided for educational purposes and should not be construed as financial or legal advice. Please consult your accountant or attorney for advice specific to your situation.