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  1. #1

    Default 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.

  2. #2
    Join Date
    Oct 2006
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    15,183

    Default Re: Amend Tax Return: Change SE Income to Other Income

    Quote Quoting fingolfinxtp
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    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.

  3. #3
    Join Date
    Jul 2007
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    Florida
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    Default 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.

  4. #4
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    Oct 2006
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    Default Re: Amend Tax Return: Change SE Income to Other Income

    Quote Quoting Bubba Jimmy
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    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.

  5. #5

    Default 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
    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?

  6. #6
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    Default 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.

  7. #7
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    Sep 2010
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    Default 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.

  8. #8
    Join Date
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    Default 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.

  9. #9
    Join Date
    Oct 2006
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    15,183

    Default 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.

  10. #10
    Join Date
    Sep 2010
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    Default 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).

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