Yes, your sister needs to report her income and expenses from this business. She may even have a deductible loss from her activity.
Showing a loss in her first year of business doesn’t
automatically mean that her direct selling activity was a hobby.
The IRS
discusses the factors that are considered when deciding if an activity is
engaged in for profit,...
The following factors, although not all inclusive, may help
you to determine whether your activity is an activity engaged in for profit or
a hobby:
- Does
the time and effort put into the activity indicate an intention to make a
profit?
- Do you
depend on income from the activity?
- If
there are losses, are they due to circumstances beyond your control or did
they occur in the start-up phase of the business?
- Have
you changed methods of operation to improve profitability?
- Do you
have the knowledge needed to carry on the activity as a successful
business?
- Have
you made a profit in similar activities in the past?
- Does
the activity make a profit in some years?
- Do you
expect to make a profit in the future from the appreciation of assets used
in the activity?
If she chose not to pursue the business this year because last year wasn't profitable, it could show that she did have a profit motive.
To report the income and expenses as a business, she would use TurboTax Self-Employed online, and her income/loss would be reported on Schedule C under Self-Employment Income.
If this was a hobby, she would report the income and expenses under Less Common Income, then scroll down to Miscellaneous Income, and select Hobby income and expenses. She would not claim a loss in that case, but only be able to claim her expenses to the extent of her income.
She should be sure to not to claim any purchases or other expenses that were for her personal use.
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