The Fine Line Between a Small Business & a Hobby

It’s a matter of work vs. fun, right?  No, the difference – at least from a tax perspective – is that you can fully deduct business expenses from income.  Under the new tax law, you can’t deduct any hobby expenses.

No single factor is determinative, but you’re probably operating a business if:

  •  You have a profit motive.
  • You keep accounting, inventory, and other records.
  • You invest significant time and effort.
  • You need the income you make from it.
  • It’s been profitable for at least three of the past five years (two out of the past seven years for horse-related activities).
  • You’ve conducted similar, profitable activities in the past.
  • You expect assets that you use to appreciate in the future.
  • You consult professional advisers to help improve profitability.

 

Many businesses start as hobbies.  If you want to make the formal transition to a business:

  1. Write a business plan.
  2. Open business banking accounts.
  3. Begin collecting state sales tax (if applicable).
  4. Choose a business entity.
  5. Engage a CPA and other advisers.