Do You Have a Hobby Vs. a Business?

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Is now the time for converting your hobby to a business? 

As there have been many recent changes to the economy, it makes sense to give this some thought. Will you still enjoy your hobby if you are doing it for money? There are rules for reporting income to the IRS depending on if your income and expenses are categorized as a hobby or business. There is no easy definition. A major difference between the two is whether the hobby is for sport or recreation or focused on actively trying to make a profit.  The IRS outlines nine elements to help determine if an activity is a hobby or a business:

  • Do you operate the activity in a businesslike fashion and keep books and records?
  • Do you put time and effort into the activity so it can be profitable?
  • Do you depend on the income from the activity, or is it just extra?
  • Are your losses beyond your control or due to normal costs associated with starting up a business?
  • Do you adjust your operational approach to increase profits?
  • Do you have business knowledge to operate the activity successfully?
  • Have you been successful in the past making a profit on a similar activity?
  • Does the activity make a profit?
  • Do you anticipate future profit as well as well as assets used in the activity to increase in value?

Under the 2018 – 2025 current tax reform called Tax Cuts and Jobs Act (TCJA), Hobby Expenses can no longer be itemized on the schedule A. Even if hobby expense could still be itemized, TCJA increased standard deductions. Meaning, it would be harder to claim those expenses (generally up to hobby income) to reduce tax liability. When business costs are more than the hobby (business) income, it is possible the loss can reduce tax liability. One of the greatest benefits about opening your own business is that an LLC just gets added to your personal information on your tax return, so therefore it is possible to decrease your overall tax liability.

I can provide early and ongoing consulting to help ensure you are off to the right start. Give me a call, or message me on Facebook.