Hobby vs. Business

Many people who begin small businesses do it to try to make money out of something they already enjoy doing. That line between when something is a hobby and when it is a business, though, can be a blurry one and it is one that comes with tax implications.

Of course, when something is strictly a hobby, it does not matter for taxes. At that point, what you spend money on and how you wish to spend your time is completely up to you. But let’s say you enjoy knitting, people know this, and you start to sell a few pieces. Have you then become a business?

The biggest line between the two is that a business operates with the expectation of turning a profit. If you craft something for a friend who pays you for the material involved, you are clearly not yet operating as a business. If you start putting up some goods online, though, even if it is just to make enough money to pay for going out to dinner once a month, you may have crossed that line.

Even then, however, the barrier between the two activities doesn’t suddenly become clear. For one thing, just how does your income get reported? In the first scenario above, your friend probably hands you some cash, no one else is ever the wiser, and that’s the end of the story. If you do start selling things online, though, you are probably going to receive a 1099-K at the beginning of the next year that reports what you were paid for goods or services over the past year. And with that, a copy is also going to the IRS, so it has become part of a story that carries over onto your tax return.

Unfortunately, some people do not realize they are crossing the line between hobby and business, and receiving such forms can be a surprise. Hopefully at that point, things have not progressed to a point where the increased tax burden is insurmountable.

If one is prepared for the transition into a business, however, there can be great power there. At that point you can be sure that you keep good records, including tracking the expenses that you have in this business, no matter how small they may be. After all, once you are a business, the expenses for that business may have become tax-deductible.

​Of course, the answers to just what expenses are deductions are not always clear to those who do not know the tax world. But entering that world knowing some are and keeping track of what you have been spending money on is this now-business will give you the power to let it work for you in the best ways possible.

Warmly,

Josh Bousquet
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