Do you cater or bake goods in your spare time? Do you make jewelry, knit quilts or even sell gently used clothing through an online market place for extra cash? Well, you may be in luck! The new tax law created a 20% tax deduction of the income you earn from such activities. There is an important hurdle you must clear first - is your activity a hobby or business?
For purposes of the QBI Deduction, a qualified trade or business is any trade or business (with exceptions, of course!).
Here are some factors to help you make the determination of whether you have a hobby or business:
Do you carry on your activity in a businesslike manner and maintain complete and accurate financial records?
Does the time and effort you put into the activity show you intend to make it profitable?
Do you depend on income from the activity for your livelihood?
Are your losses (if any) due to circumstances beyond your control (or are normal in the startup phase of your type of business)?
Do you change your methods of operation in an attempt to improve profitability?
Do you or your advisors have the knowledge needed to carry on the activity as a successful business?
Were you successful in making a profit in similar activities in the past?
Does the activity makes a profit in some years and how much profit it makes.
Do you expect to make a future profit from the appreciation of the assets used in the activity?
Hopefully, you will determine you have a trade or business and can take advantage of the new QBI Deduction! See the IRS' QBI Deduction FAQs here: