In the capitalist society in which we find ourselves today, many people come up with the idea of taking advantage of their hobbies (activities that a person does because they enjoy it and without the intention of obtaining any benefit, especially monetary) to exploit and monetize them, so that they become a source of income, and that’s great! You better enjoy what you do. This almost always happens with the idea that if it is an activity that is enjoyable to do, then the process of receiving money in return will not be so burdensome or tiring. However, determining whether such a hobby is feasible to turn into a thriving business can be confusing, but it is important to know how to differentiate it for tax purposes – and how to deduct them!
According to the IRS, the big difference that exists between a hobby and a business activity is that the business operates in a way that earns financial gain, whereas a hobby is an activity that is undertaken purely for the pleasure or recreation of the person engaging in it.
To help clarify the process, the IRS sets out some of the factors that individuals can consider when planning to monetize their hobbies to determine whether it is feasible for it to become a lucrative business or whether it is better off remaining a mere hobby.
A hobby can be a profitable business as long as…
- The person interested in the business conducts the activity in an entrepreneurial manner and keeps complete records of his or her movements.
- The person concerned depends on the income generated by the activity in question to subsist.
- The person interested in the business has issued specific licenses and permits to carry out the activity.
A hobby is only a hobby if…
- The person concerned has sufficient income from other sources to finance his or her recreational activity.
- The person concerned does not file taxes with the IRS.
- The interested person derives pleasure, amusement, or relaxation from the activity, but not financial gain.
What to do to turn your hobby into a business?
Once you have made this important decision, it is important to take the right steps with the help of experts, such as the Core CPAs & Advisors team, who will be there to guide you on the right path and make the IRS rules work in your favor.
- Keep accurate records of your movements
- Make a business plan
- Obtain the required licenses
- Regularly review your company’s performance
Consult our #TeamOfTaxExperts for more information.
Need to know more? The IRS provides the necessary information for anyone interested in conducting this type of activity. We strongly recommend that you review the requirements before making any moves so that you can have a safe and successful journey through the accounting world. The Core CPAs & Advisors team looks forward to your visit so we can tailor a business plan for you.