Q. I work full-time and I also have a side business of making party favors like candy and cake stuff. I have expenses and I get income, but it’s never more than $600 from each person. Do I have to include this income? And then can I deduct the expenses?
A. Oh, yes. You must include all the money you earn on your tax return.
The less-than-$600 level simply means the entity who pays you doesn’t need to send you a 1099 — the miscellaneous income form for the IRS.
“Just because its below the 1099 threshold and don’t receive a 1099 does not mean it should not be reported,” said Joesph Matheson, a certified public accountant with Matheson & Assoc. in Whippany. “The code reads `all income from whatever sources derived.'”
There are some instances where income can be excluded from reporting, such as life insurance proceeds, Matheson said, but income from a business wouldn’t fall under that category.
“There is no threshold for reporting income,” he said. “One dollar is reportable – if you want to be truly honest.”
You can potentially save on the tax burden by taking certain deductions for business expenses, said Gail Rosen, a Martinsville-based certified public accountant.
“You can reduce your total income by ordinary and business expenses that are allowed under the tax law on Schedule C of Form 1040,” she said. ” These could include expenses such as food supplies, business miles, insurance, advertising, etc…”
Then the net profit or loss from Schedule C is added — or reduces — your other income on your individual taxes by including it on page 1 of Form 1040, she said.
It’s also important to distinguish if your activities are really a hobby versus a business, Rosen said, because there are tax rules that limit the amount of expenses you can take. Under the hobby loss rules, you will only be able to claim deductions up the income from your business, she said.
“There are two ways to avoid the hobby loss rules,” she said. “The first way is to show a profit in at least three out of five years. The second way is to run the venture in such a way to show that you intend to turn it into a profit-maker, rather than operate it as a mere hobby.”
Good luck with your taxes, and with your “candy and cake stuff.”
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