Business or Hobby
It’s important to love what you do, but for tax filing and planning purposes it’s important to make a clear distinction between if you’re operating as a business or creating your craft for the love of it, hobby.
There are pros and cons to both, however, from a financial standpoint conducting yourself as a business not only creates additional income, it also allows for the deduction of expenses. In other words, the money you spend to create can be written off. This is not the case if you choose to operate as a hobby.
Let’s explore the difference between the two, a hobby is a regular activity done for enjoyment, typically during one’s leisure time, usually not professionally and not for pay. A business is an activity conducted with the expectation of money earned.
So by definition and according to the IRS, the two are not the same.
Honestly, there’s no way to tell a business from a hobby, so to error on the side of caution. I use this general rule of thumb: If your business reports a net profit in at least three (3) out of five (5) years, the IRS presumes that it’s a for-profit business. If your business reports a net loss in more than two out of five years, it’s presumed to be a not-for-profit hobby, and then no expenses can be deducted.
There is no pressure to be a business if you truly would like to keep your craft as a hobby. However, if you earn money from it you must report that money as income and you are not allowed to deducted the expenses it cause you to operate your hobby. And this discrepancy is what cause most people to treat their hobby as a business.
There are some rules and regulations to operate as a legitimate business, such as carry on in a businesslike manner, keep good records, have current licenses, etc.
This will greatly assist if any confusion arises as to whether you’re a business or not, to get the full benefit to tax credits and deductions.
Here are 9 steps the IRS use to help them choose:
1. You carry on the activity in a businesslike manner and have a primary goal to make profit2. The time and effort you put into the activity indicate that you intend to make it profitable.3. You depend on income from the activity for your livelihood.4. Your losses are due to circumstances beyond your control or they’re considered normal in the start-up phase of your particular type of business.5. You change your methods of operation in an attempt to improve profitability.6. You or your advisors have the necessary knowledge to carry on the activity as a successful business.7. You were successful in making a profit with similar activities in the past.8. If the activity makes a profit in some years, the IRS will consider how much of a profit it makes.9. You can expect to make a future profit from the appreciation of the assets used in the activity. Choose wisely…. LaQuitta