How do you know if your business is really a hobby?

Have you eaccounting_for_non_accountantsver thought of turning your hobby into a money maker? With websites like ETSY it’s easy!  Making money off your after work and weekend projects sounds great – but there are a few things to consider when tax season rolls around.  Sites like ETSY report what you sell to the IRS, therefore, you will need to report it on your tax return.  Where and how it will be reported is a big question to consider.  Our answer-it depends.  The IRS has many factors they consider when determining if your hobby is actually a hobby.

Some of these considerations are:

How your new venture is run. Do you keep stringent records, reconfigure your work to make it more profitable, do you act like a business?

  • How much time and effort do you put into your hobby?
  • Have you or do you intend to profit off your hobby in the last few years?
  • How much of a profit are you making?
  • Are you relying on this income to make your living?

Essentially, if you engage in a hobby in order to make a profit the IRS will most likely consider your hobby a “business.”  An occasional activity that you happen to make money on is a hobby.  If your hobby is in fact a “hobby” you will need to report your income as “other income” on your return.  Any expenses, up to the amount of income you made, can be claimed as an itemized deduction (subject to the 2% of adjusted gross income rule).  However, if you do not itemize and instead take the standard deduction you lose any benefit from those expenses.

Does one of the above considerations apply to you? Congratulations you are a business.  If you are the only person entitled to profits or the only one responsible for debts then you are a sole proprietor.  As a sole proprietor you will need to file using Schedule C on your personal 1040 tax return.  You will report your income and any expenses you incurred for your business.  Typical expenses include supplies, advertising, insurance, utilities, and office expense.  You can even claim vehicle mileage or other auto expenses if you use your car for business purposes. In general, Schedule C businesses typically report a profit of less than $5,000, don’t have any employees, and don’t have inventory.

Do you have hobby income? If so but you are not sure whether you are a business or just have a hobby please do not hesitate to contact us.

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