Gradual transition from business to hobby


E

Ed Roberts Jr

Taxpayer started a business in 2007 as a mobile DJ, playing at weddings, company parties, etc. Taxpayer treated it as a business from the beginning, setting up a website, accepting checks in the name of the business, etc.

As business income increased, so did expenses, even when properly depreciated, so the business never made a profit. One might say that the profit was poured back into expanding the business.

In the last year or two -- it's impossible to point to a date when this happened -- the taxpayer lost interest and stopped trying to drum up business. Now the taxpayer just drags the equipment out now and then to do a friend's gig. Both income and expenses are so low (less than $1,000 either way) they don't make much of a difference to the taxpayer's bottom line, although they have to be accounted for somehow.

How should the taxpayer treat this gradual change from business to hobby? Simply stop filing Schedule C, stop depreciating equipment, and list the meager income on Line 21?

Thanks,
Ed
 
Ad

Advertisements

A

Arthur Kamlet

Taxpayer started a business in 2007 as a mobile DJ, playing at weddings,
company parties, etc. Taxpayer treated it as a business from the
beginning, setting up a website, accepting checks in the name of the
business, etc.

As business income increased, so did expenses, even when properly
depreciated, so the business never made a profit. One might say that the
profit was poured back into expanding the business.

In the last year or two -- it's impossible to point to a date when this
happened -- the taxpayer lost interest and stopped trying to drum up
business. Now the taxpayer just drags the equipment out now and then to
do a friend's gig. Both income and expenses are so low (less than $1,000
either way) they don't make much of a difference to the taxpayer's
bottom line, although they have to be accounted for somehow.

How should the taxpayer treat this gradual change from business to
hobby? Simply stop filing Schedule C, stop depreciating equipment, and
list the meager income on Line 21?

Essentially yes. If you convert any depreciable former business
equipment to personal use, then you will have to recapture (treat
as income) any depeciation you claimed in excess of straight line.
Use Form 4797 for that.
 
M

Mark Bole

Nonetheless, I strongly recommend that the taxpayer identify a specific
date that is at least not unreasonable, and use it on a timely filed
return. If nothing else, this will start the statute of limitations.

This date will be the dividing line for income and expenses on Schedule
C vs. Line 21/Schedule A.


Now the taxpayer just drags the equipment out now and then to

File a final schedule C, yes. Continue to depreciate. List income on
Line 21, and hobby expenses on Schedule A according to the hobby loss
rules, see Pub 535.

Essentially yes. If you convert any depreciable former business
equipment to personal use, then you will have to recapture (treat
as income) any depeciation you claimed in excess of straight line.
Use Form 4797 for that.

Equipment used for hobby activities is still depreciated, but the
allowed amount is limited by the hobby loss rules. I don't believe any
recapture would be required simply by change of use from business to hobby.
 
E

Ed Roberts Jr

Nonetheless, I strongly recommend that the taxpayer identify a specific
date that is at least not unreasonable, and use it on a timely filed
return. If nothing else, this will start the statute of limitations.
Does this date actually appear on the return anywhere, or by "use it" do you refer only to using it as a means to calculate what you write next?
This date will be the dividing line for income and expenses on Schedule
C vs. Line 21/Schedule A.
[...]

File a final schedule C, yes. Continue to depreciate. List income on
Line 21, and hobby expenses on Schedule A according to the hobby loss
rules, see Pub 535.
By "final schedule C" do you mean anything other than: file one more, and then stop filing it? There's nowhere on the form to indicate that it's the last one (unlike the typical state sales tax return).

Thanks for your time, Mark and Art!

Ed
 
Ad

Advertisements

M

Mark Bole

Nonetheless, I strongly recommend that the taxpayer identify a specific
date that is at least not unreasonable, and use it on a timely filed
return. If nothing else, this will start the statute of limitations.
Does this date actually appear on the return anywhere, or by "use it" do you refer only to using it as a means to calculate what you write next?
This date will be the dividing line for income and expenses on Schedule
C vs. Line 21/Schedule A.
[...]

File a final schedule C, yes. Continue to depreciate. List income on
Line 21, and hobby expenses on Schedule A according to the hobby loss
rules, see Pub 535.
By "final schedule C" do you mean anything other than: file one
more,
and then stop filing it? There's nowhere on the form to indicate that
it's the last one (unlike the typical state sales tax return).
Thanks for your time, Mark and Art!

Ed

Yes, that's what I meant about final Schedule C. If the tax software
asks about a "final disposition of this activity", the answer would be
no, as the activity was not disposed. Transferring the assets in the
software from Schedule C to Schedule A may or may not be easy to accomplish.
 

Ask a Question

Want to reply to this thread or ask your own question?

You'll need to choose a username for the site, which only take a couple of moments. After that, you can post your question and our members will help you out.

Ask a Question

Similar Threads


Top