What is a hobby?

I’m not talking about snowboarding or Crossfit or hiking, though these are awesome hobbies (if these are your hobbies, we should be friends). I’m talking about the business versus hobby relationship. A hobby where you make a little side money. Here’s an example, my mom likes to make and sell wreaths. She enjoys this. But is not looking to provide herself livable income off this. This is a hobby. It is an activity not actively engaged in for profit.

Here are some questions to ask if you are trying to determine if you have a hobby or business:

- Do you depend on the income of the activity?
- Does the time and effort put into the activity indicate an intention to make a profit?
- Has the activity made profit in the past 3 of 5 years?
- Are you involved with the activity solely to make a profit?
- Do you maintain separate records and accounts for the activity?

If these questions do not apply to you. The IRS will likely deem that you have a hobby. The good news is that the IRS allows you to deduct expenses related to these hobbies to the extent of income you make from them. The bad news is that hobbies cannot offset personal income, and many deductions that would be allowed if you had a business are no longer allowed. So be sure you have a business rather than a hobby. Some tips to ensure you have a viable business:

- Separate business form personal transactions.
- Have a separate EIN for your business (google EIN Registration… takes 3 minutes to apply).
- Have a separate business checking account.
- Maintain records for the business.
- Consult with an expert regarding your business.
- Manage it like a business rather than a hobby.

As always. Have questions? Comment below or email us at hello@skywardaccounting.com.

Comment