How will changing a small business to a hobby affect my taxes?

[CindyD]

I've had a small business LLC for several years. I have never had a profit. I have always claimed this loss. If I choose to change my status to hobby, how will this affect my taxes?

[Anonymous_]

With respect to taxes, you have to report income from the "hobby" but you can only deduct expenses up to the amount of "hobby income". If you wind up with a net loss (i.e. expenses exceed income), you cannot deduct that loss from other income.

EDIT: Note beginning in 2018, the IRS doesn't allow you to deduct hobby expenses from hobby income. You must claim all hobby income and are not permitted to reduce that income by any expenses.

See https://turbotax.intuit.com/tax-tips/self-employment-taxes/4-tax-tips-for-money-making-hobbies/L89qz...

Thanks, @mesquitebean 

The IRS basically uses several factors (see the link below) when making a distinction between a hobby or business activity.

See https://www.irs.gov/faqs/small-business-self-employed-other-business/income-expenses/income-expenses

[mesquitebean]

@CindyD 

Please return to the forum to see the revised information left for you.

[CindyD]

Thank you for that info, but I was hoping for kind of an idea of how it will actually affect my taxes.

Of course I've had this business deduction for some time. I'm worried that without the business deduction my taxes will be an amount I can't afford or am not prepared for.

Does this make sense?

How much would removing the business affect the bottom line? Is there an easy way to estimate that?

I was even thinking of going into my 2018 Turbo Tax program and removing the schedule C and see what happens to my numbers. Bad idea?

[Anonymous_ · Accepted solution]

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@CindyD wrote:

 Bad idea?

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No, not at all. In fact, that is a great idea; run through several scenarios (what-ifs) using the program (be careful not to overwrite tax files (.tax2018) that you want to retain).

[CindyD]

Thank you for your help!

[HelenC1]

If you change the way you report your small business LLC, from a business to a hobby, you won't be able to claim a loss, so you'll likely pay more in income taxes. The IRS doesn't allow you to deduct hobby expenses directly from hobby income.

Per IRS article Hobby or Business? IRS Offers Tips to Decide:

• Limits on Hobby Expenses: Generally, taxpayers can only deduct hobby expenses up to the amount of hobby income. If hobby expenses are more than its income, taxpayers have a loss from the activity. However, a hobby loss can’t be deducted from other income.

• How to Deduct Hobby Expenses: Taxpayers must itemize deductions on their tax return to deduct hobby expenses. Expenses may fall into three types of deductions, and special rules apply to each type. See Publication 535 for the rules about how to claim them on Schedule A, Itemized Deductions.

[Dodogary]

How do you change your LLC business to hobby? Do you need to mail a cancelling EIN# letter to IRS before you change your LLC to hobby? I have the same problem. My business LLC has had loss for 2 years. Thank you 

[Anonymous_]

@Dodogary The IRS considers nine factors in making the distinction between a hobby or business activity.

• Whether you carry on the activity in a businesslike manner and maintain complete and accurate books and records.
• Whether the time and effort you put into the activity indicate you intend to make it profitable.
• Whether you depend on income from the activity for your livelihood.
• Whether your losses are due to circumstances beyond your control (or are normal in the startup phase of your type of business).
• Whether you change your methods of operation in an attempt to improve profitability.
• Whether you or your advisors have the knowledge needed to carry on the activity as a successful business.
• Whether you were successful in making a profit in similar activities in the past.
• Whether the activity makes a profit in some years and how much profit it makes.
• Whether you can expect to make a future profit from the appreciation of the assets used in the activity.

See https://www.irs.gov/faqs/small-business-self-employed-other-business/income-expenses/income-expenses

[Ac711]

If the business is changed to a hobby, are you required to pay back the taxes from past deductions as a business?