Is it a Hobby or a Business? Use Your Common Sense
Is it possible to turn your hobby into a business? Possibly, but there are some definitive IRS rules you need to be aware of—and income you need to report on your tax return.
Hobbies are near and dear to us. They help us get through stressful times and reflect our passions. In my own case, I love growing my own vegetables and raising chickens, so if I were to really pursue making money from my hobby, I might open up a roadside vegetable stand, or have a booth at the local Farmer’s Market to sell vegetables and eggs.
IRS Requirements
That seems harmless enough, but is the money you earn taxable?
It depends. According to the IRS, a business operates to make a profit, while people engage in a hobby for sport or recreation—not to make a profit. Seems pretty straightforward. However, the IRS provides 11 specific situations you must consider. Keep in mind that none of these 11 factors are more important than another; they all must be considered.
You carry out the activity in a businesslike manner, and maintain complete and accurate books and records.
You put time and effort into the activity to show you intend to make your efforts profitable.
You depend on the income from the activity for your livelihood.
You have personal motives for carrying out the activity, such as general enjoyment or relaxation.
You have enough income from other sources to fund the activity.
Losses are due to circumstances beyond your control, or are normal for the startup phase of your type of business.
There is a change to methods of operation to improve profitability.
You and your “advisor” or team have the knowledge needed to carry out the activity as a successful business.
You were successful in making a profit in similar activities in the past.
You make a profit in some years; and need to know how much profit it makes.
You can expect to make a future profit from the appreciation of the assets used in the activity.
If you receives income from an activity that is carried on with no intention of making a profit, you must report the income you receive under “Other Income” on Schedule 1, Form 1040, line 8.
Use Your Head
So back to my situation with my possible roadside stand or market booth. Common sense says that “no,” I am not dependent on this activity for my livelihood. After all, where would I find the time in between working with my clients at Certum Solutions, raising a family and participating in local activities?
However, let’s say you have a loom at home, and turn your knitting into a business. You’re done with the corporate life of a service business—and instead just want to do what your passionate about. Common sense says you definitely can make money with this type of business. Just think “special orders” and your business will go cha-ching!
Certum Can Help
We’re here to help you sort these kinds of matters out. Whether you want some bookkeeping guidance, need assistance setting up QuickBooks, or need to set up your e-commerce site, Certum Solutions wants to be your trusted partner.
Have fun with that hobby!