{"id":193,"date":"2018-07-16T12:09:51","date_gmt":"2018-07-16T12:09:51","guid":{"rendered":"http:\/\/www.danaleecpa.com\/blog\/?p=193"},"modified":"2018-07-16T12:09:51","modified_gmt":"2018-07-16T12:09:51","slug":"when-hobby-becomes-business","status":"publish","type":"post","link":"https:\/\/www.danaleecpa.com\/blog\/when-hobby-becomes-business\/","title":{"rendered":"When a Hobby Becomes a Business"},"content":{"rendered":"<p><em>A few dollars here, a few dollars there. What do you do when the money from a hobby starts to add up?<\/em><\/p>\n<p>Maybe you didn\u2019t consider it a real business when you first started working on friends\u2019 computers or building birdhouses or designing logos and other graphics for people. At first, you just charged for materials. But eventually, you started charging more for your time, and then you realized that you were making a profit from your work.<\/p>\n<p>That\u2019s when the Internal Revenue Service gets interested. If you\u2019ve turned a profit for three of the last five years (including the current one), the IRS considers your hobby to be a business, complete with the obligation to pay income taxes.<\/p>\n<p>The good news is, of course, that you can start writing off some expenses. And there\u2019s something to be said for building something from nothing on your own. But you need to consider whether it\u2019s time to formalize your venture by filing a Schedule C.<img loading=\"lazy\" decoding=\"async\" src=\"images\/image_library\/articles\/TaxPlan%200317%20image%201_zpssralqhul.jpg\" alt=\"\" width=\"781\" height=\"282\" \/><\/p>\n<p>When it\u2019s time to stop calling it a hobby and call it a business, you\u2019ll be filing a Schedule C with your Form 1040.<\/p>\n<h3><strong>9 Questions For Your Hobby Activity<\/strong><\/h3>\n<p>There is some gray area in determining the difference between being a hobby or a business in the eyes of the IRS. If you think you\u2019re a business and you\u2019re happily doing what you\u2019re doing to make a profit, you\u2019re a business.<\/p>\n<p>Maybe, though, you\u2019d rather your efforts remained a hobby. There\u2019s no absolute, cut-and-dried test to determine your status. But there are nine issues that the IRS would like you to consider. The agency wants you to &#8220;\u2026take into account all facts and circumstances with respect to the activity. No one factor alone is decisive.&#8221;<\/p>\n<p>Here, then, is what you\u2019ll need to ask yourself.<\/p>\n<ul>\n<li>Whether you\u2019re carving little wooden figures, creating your own jewelry, or writing online content for people, are you doing it in a &#8220;businesslike manner?&#8221;<\/li>\n<li>Think of the time and effort you put into your work. Are they enough that it seems you\u2019re clearly trying to make your venture profitable?<\/li>\n<li>Do you need the money you\u2019re making? Does it represent at least a part of your livelihood?<\/li>\n<li>What about the losses you\u2019ve taken? Are they caused by &#8220;circumstances beyond your control?&#8221; Or do you consider them normal for a fledgling small business?<\/li>\n<li>Have you ever changed the way you do things to turn a higher profit?<\/li>\n<li>Are you going it alone, or are people advising you? Do you&#8211;or they&#8211;know enough about what\u2019s required to turn your hobby into a successful business?<\/li>\n<li>Did you make a profit in previous years from doing the same activity?<\/li>\n<li>Do you make a profit some years? How much?<\/li>\n<li>Are you anticipating making a profit in future years from the &#8220;appreciation of the assets used in the activity?&#8221;<\/li>\n<\/ul>\n<h3><strong>Claiming Expenses<\/strong><\/h3>\n<p><img loading=\"lazy\" decoding=\"async\" src=\"images\/image_library\/articles\/TaxPlan%200317%20image%202_zpsqxq5gmqp.jpg\" alt=\"\" width=\"627\" height=\"250\" \/>You\u2019ll claim business expenses on the <a href=\"https:\/\/www.irs.gov\/forms-pubs\/schedule-c-form-1040-profit-or-loss-from-business\">Schedule C<\/a>.<\/p>\n<p>The IRS does have rules about what you may and may not claim on the Schedule C as business expenses. You\u2019ll learn all about them the first time you file taxes as a business.<\/p>\n<p>The agency\u2019s general rule of thumb is that you can deduct &#8220;ordinary and necessary expenses&#8221; required by the work that you do. Other words it uses to define the allowable expenses are:<\/p>\n<ul>\n<li>Common<\/li>\n<li>Accepted, and,<\/li>\n<li>Appropriate.<\/li>\n<\/ul>\n<p>Here\u2019s where you may need our help. You can, of course, call us if you want to talk about whether you are indeed a business. You may also want to explore your options for your business structure. Many one-person ventures are sole proprietors, but there are alternatives.<\/p>\n<p>Determining what you can and cannot claim as legitimate business expenses may be challenging for you the first time or two around. We can help you in three ways here. First, we\u2019ll get you set up with good cloud-based applications or mobile apps that can help you with your ongoing record-keeping. Attempting to run a business on paper is very difficult, and things can slip through the cracks.<\/p>\n<p>We\u2019re also available to work with you on your income tax return. Finally, once we\u2019ve learned about your business, we can get you started on a year-round tax planning strategy. No one likes surprises at tax filing time, and we\u2019d be happy to help you avoid them.<\/p>\n<p><a href=\"https:\/\/www.danaleecpa.com\/contact.htm\">Call us<\/a> today.<\/p>\n","protected":false},"excerpt":{"rendered":"<p>A few dollars here, a few dollars there. What do you do when the money from a hobby starts to add up? Maybe you didn\u2019t consider it a real business when you first started working on friends\u2019 computers or building birdhouses or designing logos and other graphics for people. At first, you just charged for [&hellip;]<\/p>\n","protected":false},"author":2,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_genesis_hide_title":false,"_genesis_hide_breadcrumbs":false,"_genesis_hide_singular_image":false,"_genesis_hide_footer_widgets":false,"_genesis_custom_body_class":"","_genesis_custom_post_class":"","_genesis_layout":"","footnotes":""},"categories":[1],"tags":[],"class_list":{"0":"post-193","1":"post","2":"type-post","3":"status-publish","4":"format-standard","6":"category-uncategorized","7":"entry"},"_links":{"self":[{"href":"https:\/\/www.danaleecpa.com\/blog\/wp-json\/wp\/v2\/posts\/193","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.danaleecpa.com\/blog\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.danaleecpa.com\/blog\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.danaleecpa.com\/blog\/wp-json\/wp\/v2\/users\/2"}],"replies":[{"embeddable":true,"href":"https:\/\/www.danaleecpa.com\/blog\/wp-json\/wp\/v2\/comments?post=193"}],"version-history":[{"count":3,"href":"https:\/\/www.danaleecpa.com\/blog\/wp-json\/wp\/v2\/posts\/193\/revisions"}],"predecessor-version":[{"id":196,"href":"https:\/\/www.danaleecpa.com\/blog\/wp-json\/wp\/v2\/posts\/193\/revisions\/196"}],"wp:attachment":[{"href":"https:\/\/www.danaleecpa.com\/blog\/wp-json\/wp\/v2\/media?parent=193"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.danaleecpa.com\/blog\/wp-json\/wp\/v2\/categories?post=193"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.danaleecpa.com\/blog\/wp-json\/wp\/v2\/tags?post=193"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}