Business matters
Oh, No! I’m being audited! By Carol Gordon, CPA
job. You are not a tax preparer, just like you aren’t an electrician. Please – don’t do your own electrical work or prepare your own tax return. 4. Make every effort to run your business as a business. The IRS guidelines for distinguishing between a business and a hobby
If I asked each of you to make a list of 5 things that you really want to do in the next 5 years,
are below. The tax consequences of one
it would be VERY unlikely that any of you would choose to experience an IRS audit. But for 1
vs. the other are very significant.
out of every 44 of you (over a 5-year period, based on 2019 statistics), you will have that unlucky experience. And if you file a Schedule C, your chances of being audited are multiplied
Question
by almost 3 times. Some of being selected for an audit really is (bad) luck but there are some
How do you distinguish between a business and
things that you can do to minimize your risk. And if you are selected for an audit, there are
a hobby?
some things that you can do to minimize the time and pain involved.
5 things you can do to minimize your risk of an audit:
Answer
2. Provide 1099 Forms to all of the applica-
In making the distinction between a hobby or
ble vendors and submit the forms to the
business activity, take into account all facts and
1. Report ALL of your taxable income. IRS
vendors and IRS on a timely basis. If one
circumstances with respect to the activity. A hobby
auditors have access to detailed industry
of your vendors reports income from you,
activity is done mainly for recreation or pleasure.
information for every area of the country.
for which you should have provided them
No one factor alone is decisive. You must generally
So, they will know the average annual cost
a 1099 but did not, that’s another red flag.
consider these factors in determining whether an
of care of a horse. If you report expenses
You may believe that a particular vendor
activity is a business engaged in making a profit:
for the care of 10 school horses and only
does not report some of their income, but
• Whether you carry on the activity in a busi-
report income equivalent to lessons on 5
it would be a shame to find out the “hard
nesslike manner and maintain complete and
horses, that will raise a red flag on your
18
way” that you were wrong.
accurate books and records.
return. One red flag doesn’t necessarily
3. Pay to have your return prepared. Your job
• Whether the time and effort you put into
trigger an audit but it’s definitely a cause
is being an instructor, barn owner, trainer
the activity indicate you intend to make it
for concern.
(how many hats is that?). It’s a full-time
profitable.
Fall 2020 | Riding Instructor
