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Amending a Tax Return to Change Self-Employed Income to Something Else

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  • 01-09-2013, 06:06 PM
    fingolfinxtp
    Amending a Tax Return to Change Self-Employed Income to Something Else
    I installed and fine-tuned a sophisticated computer system for my friend and got some and got some money. I accepted payment in checks, I got no 1099-MISC (my friend was too lazy). I got about 11000, out of which about 6000 was the equipment I installed in his basement, about 4000 I retained as a profit. I was filing a tax return by myself, so I filed this amount as a self-employed income (schedule C and schedule SE).

    following factors from the pub 535 apply:
    1. I did not depend on income from this activity
    2. This is one-time activity, never before, never after
    3. This activity is way outside what I normally do, my primary motivations were:
    - to spend time with my friend
    - learn something new by doing it.

    I wonder, today, can I reclassify this income as misc income, report deductions on 1040A and claim back the SE tax?

    How likely is it to trigger the audit?
    How likely is it to trigger the audit if I reduce the amount of the deductions taken?
    Will it still trigger the audit if I reduce the amount of the deductions claimed to a point where I will owe more tax and pay the said tax? (Just to avoid reporting any SS subject payments for this period of time).

    No 1099-MISC was ever filed. Please, share your thoughts.
  • 01-09-2013, 06:49 PM
    llworking
    Re: Amend Tax Return: Change SE Income to Other Income
    Quote:

    Quoting fingolfinxtp
    View Post
    I installed and fine-tuned a sophisticated computer system for my friend and got some and got some money. I accepted payment in checks, I got no 1099-MISC (my friend was too lazy). I got about 11000, out of which about 6000 was the equipment I installed in his basement, about 4000 I retained as a profit. I was filing a tax return by myself, so I filed this amount as a self-employed income (schedule C and schedule SE).

    following factors from the pub 535 apply:
    1. I did not depend on income from this activity
    2. This is one-time activity, never before, never after
    3. This activity is way outside what I normally do, my primary motivations were:
    - to spend time with my friend
    - learn something new by doing it.

    I wonder, today, can I reclassify this income as misc income, report deductions on 1040A and claim back the SE tax?

    How likely is it to trigger the audit?
    How likely is it to trigger the audit if I reduce the amount of the deductions taken?
    Will it still trigger the audit if I reduce the amount of the deductions claimed to a point where I will owe more tax and pay the said tax? (Just to avoid reporting any SS subject payments for this period of time).

    No 1099-MISC was ever filed. Please, share your thoughts.

    Sorry, but that definitely was self employment. You are not going to be able to amend your return to remove the SE tax.
  • 01-09-2013, 08:04 PM
    Bubba Jimmy
    Re: Amend Tax Return: Change SE Income to Other Income
    Whether you depend on the income or not is irrelevant. Whether you did it once or many times is irrelevant. Whether you normally do it or not is irrelevant. You engaged in an income-producing activity and received actual income. Such an activity is rightly subject to the SE tax. Many self-employed people receive no 1099-MISC. You are required to claim your correct expenses.

    If you were driving a race car, you might perhaps classify it as a hobby. Installing computer systems is not a hobby activity.
  • 01-09-2013, 08:44 PM
    llworking
    Re: Amend Tax Return: Change SE Income to Other Income
    Quote:

    Quoting Bubba Jimmy
    View Post
    Whether you depend on the income or not is irrelevant. Whether you did it once or many times is irrelevant. Whether you normally do it or not is irrelevant. You engaged in an income-producing activity and received actual income. Such an activity is rightly subject to the SE tax. Many self-employed people receive no 1099-MISC. You are required to claim your correct expenses.

    If you were driving a race car, you might perhaps classify it as a hobby. Installing computer systems is not a hobby activity.

    I doubt that even a hobby classifcation would work with anything that resulted in 4k worth of profit.
  • 01-09-2013, 10:48 PM
    fingolfinxtp
    Re: Amend Tax Return: Change SE Income to Other Income
    Thank you for your replies. Can you help me understand the logic here?
    Primary factor is
    Quote:

    engaging in an income-producing activity and received actual income
    . I recollect a case on IRS website about a professor authoring a book, being classified as a misc income. How are those two cases different?
  • 01-10-2013, 08:38 AM
    Mr. Knowitall
    Re: Amend Tax Return: Change SE Income to Other Income
    Read the case and let us know the court's rationale, or find the case and share a link.
  • 01-10-2013, 09:48 AM
    flyingron
    Re: Amend Tax Return: Change SE Income to Other Income
    I suspect you are talking about royalty income which is a separate tax principle and it does depend if the work was in the business of regularly being a writer or as a part of a disjoint procedure.
  • 01-12-2013, 06:43 PM
    Bubba Jimmy
    Re: Amend Tax Return: Change SE Income to Other Income
    Royalty income is reported on a Schedule E, not as miscellaneous income. A person could make $4000 in hobby income. My wife paints porcelain works of art as a hobby, and actually sells some occassionally. She'd do it whether or not she made a profit. Now, if you make money 3 of 5 years then there is the presumption that your reason is profit motive regardless. But a single year of income in any amount could well be hobby income.
  • 01-13-2013, 06:05 AM
    llworking
    Re: Amend Tax Return: Change SE Income to Other Income
    Quote:

    Quoting Bubba Jimmy
    View Post
    Royalty income is reported on a Schedule E, not as miscellaneous income. A person could make $4000 in hobby income. My wife paints porcelain works of art as a hobby, and actually sells some occassionally. She'd do it whether or not she made a profit. Now, if you make money 3 of 5 years then there is the presumption that your reason is profit motive regardless. But a single year of income in any amount could well be hobby income.

    Not in this case Bubba...no way. He made 4k in profit on a single job which clearly shows that his intent was to make a profit.
  • 01-13-2013, 08:12 AM
    flyingron
    Re: Amend Tax Return: Change SE Income to Other Income
    They don't give a hoot about profit motive if you are making income. Income is always taxable regardless of your motive.
    Whether you have a hobby or business motive comes into what they allow if you LOSE money.

    There's a $400 floor on being subject to the Self Employment tax, but there's no limit on income that must be reported (taxed).
  • 01-13-2013, 11:34 AM
    llworking
    Re: Amend Tax Return: Change SE Income to Other Income
    Quote:

    Quoting flyingron
    View Post
    They don't give a hoot about profit motive if you are making income. Income is always taxable regardless of your motive.
    Whether you have a hobby or business motive comes into what they allow if you LOSE money.

    There's a $400 floor on being subject to the Self Employment tax, but there's no limit on income that must be reported (taxed).

    My post was referencing hobby income vs self employment.
  • 01-13-2013, 02:25 PM
    Bubba Jimmy
    Re: Amend Tax Return: Change SE Income to Other Income
    The IRS puts it this way:

    Quote:

    Quoting IRS
    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?

    An activity is presumed for profit if it makes a profit in at least three of the last five tax years, including the current year (or at least two of the last seven years for activities that consist primarily of breeding, showing, training or racing horses).

    There is no test based on how much is made from an activity.

    Ron, all income must be reported but the difference is where on the return it is reported. If the activity is self-employment then it goes on Schedule C. Hobby income goes on line 21 just like jury duty pay. Royalty income not associated with one's regular trade or business goes on Schedule E.

    I have a client who goes to local nursing homes and plays the piano for the residents. Occasionally the nursing home insists on paying him something. He would do this whether they paid him or not. Once he got to three years out of five making money doing this it became self-employment income. Until then it was a hobby, regardless of the amount. Some people engage in high-dollar hobbies like showing horses. If you win best in show the prize money can be substantial, but unless you make money at it 2 of 7 years (specific rule for horse activities) it is still hobby income. The benefit is avoidance of the SE tax. The disadvantage is that expenses go on Schedule A only if you have enough total qualifying expenses to itemize.
  • 01-13-2013, 07:05 PM
    llworking
    Re: Amend Tax Return: Change SE Income to Other Income
    Quote:

    Quoting Bubba Jimmy
    View Post
    The IRS puts it this way:



    There is no test based on how much is made from an activity.

    Ron, all income must be reported but the difference is where on the return it is reported. If the activity is self-employment then it goes on Schedule C. Hobby income goes on line 21 just like jury duty pay. Royalty income not associated with one's regular trade or business goes on Schedule E.

    I have a client who goes to local nursing homes and plays the piano for the residents. Occasionally the nursing home insists on paying him something. He would do this whether they paid him or not. Once he got to three years out of five making money doing this it became self-employment income. Until then it was a hobby, regardless of the amount. Some people engage in high-dollar hobbies like showing horses. If you win best in show the prize money can be substantial, but unless you make money at it 2 of 7 years (specific rule for horse activities) it is still hobby income. The benefit is avoidance of the SE tax. The disadvantage is that expenses go on Schedule A only if you have enough total qualifying expenses to itemize.

    So, are you saying that you would sign the OP's amended return showing the income as hobby income? I sure as heck wouldn't.
  • 01-15-2013, 03:19 PM
    Bubba Jimmy
    Re: Amend Tax Return: Change SE Income to Other Income
    What I was trying to do was to lead him to an understanding of the factors involved in making the determination. He made the correct determination when he filed Schedules C and SE. Then he asked if he could get away with mischaracterizing on the basis of certain factors. During the conversation I was trying to get across the notion that the amount of money involved alone is not the determining factor.

    The issue of whether a 1099-MISC was issued or not is immaterial. So is the issue of whether one depends on the income to live. I offered examples where someone could receive a substantial amount of money and still be engaged in a hobby. The main factor is whether the motive is profit, and the IRS offers a number of tests to help make the determination, as I cited. There is no single factor. Tax issues are commonly more complex than that.
  • 01-15-2013, 03:34 PM
    llworking
    Re: Amend Tax Return: Change SE Income to Other Income
    Quote:

    Quoting Bubba Jimmy
    View Post
    What I was trying to do was to lead him to an understanding of the factors involved in making the determination. He made the correct determination when he filed Schedules C and SE. Then he asked if he could get away with mischaracterizing on the basis of certain factors. During the conversation I was trying to get across the notion that the amount of money involved alone is not the determining factor.

    The issue of whether a 1099-MISC was issued or not is immaterial. So is the issue of whether one depends on the income to live. I offered examples where someone could receive a substantial amount of money and still be engaged in a hobby. The main factor is whether the motive is profit, and the IRS offers a number of tests to help make the determination, as I cited. There is no single factor. Tax issues are commonly more complex than that.

    Ok...you were coming across as if you were agreeing with him that he could recharacterize the income as hobby income. It is reassuring that you were not.
  • 01-15-2013, 06:53 PM
    Bubba Jimmy
    Re: Amend Tax Return: Change SE Income to Other Income
    In post #12 I inserted an excerpt from the IRS' website. I try to cite authoritative sources for the things I say here, and that post fairly well sums up what I was saying. Here they are again:

    Quote:

    Does the time and effort put into the activity indicate an intention to make a profit?
    I don't think many people could make the argument that they engage in the procurement and installation of complex computer systems for others, receiving compensation in the process, as a hobby.

    Quote:

    Do you depend on income from the activity?
    This test could go either way in the present case, but is not a sole determinant.


    Quote:

    If there are losses, are they due to circumstances beyond your control or did they occur in the start-up phase of the business?
    There were no losses.

    Quote:

    Have you changed methods of operation to improve profitability?
    N/A

    Quote:

    Do you have the knowledge needed to carry on the activity as a successful business?
    Clearly this person has the professional expertise do profitably procure and install complex computer systems.

    Quote:

    Have you made a profit in similar activities in the past?
    I highly doubt this is the first time this person has ever procured and/or installed a complex computer system for compensation.

    Quote:

    Does the activity make a profit in some years?
    It did this year.

    Quote:

    Do you expect to make a profit in the future from the appreciation of assets used in the activity?
    N/A

    Taken as a whole the weight of the evidence is that this was self-employment.

    The lone factor that he made a profit in one year of $4000 from an activity is not enough in and of itself to prove it was not hobby income. But based on what I said in post #3, I can't figure out for the life of me how you could construe that I was saying it was hobby income. I said exactly the opposite. What I was doing in my subsequent posts was to clarify the step-by-step process that would allow a person to make that determination.
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