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What is a business?

Is that a hobby, or a business you have there?

Customized Business Services

A business is not a hobby.  If you engage in an activity and do not expect to profit from this activity, it is considered a hobby, and nothing may be deducted off of your personal tax returns as an expense to offset other income.  However, if it is your intention to make a profit from this activity, then the IRS classifies this as a business and requires you to report ALL income and allows you to deduct ordinary expenses (as defined by the IRS – an expense that is common, necessary and accepted in the taxpayer’s trade or business).

A common (and very costly if you are ever audited) mistake is to go into business and have regular business losses to offset other income you may have.  The IRS fully expects you to make a profit on a somewhat regular basis and will investigate if losses occur every year.

See IRS Publication 535, Business Expenses for further information (www.irs.gov)

Sometimes it is obvious that you have a business, and sometimes not so much.  Take photography for instance.  You like to take pictures, you have a “good eye”, and before you know it someone close to you says “hey, you should sell those pictures”!  You just moved from a hobby to a business.  This is fine, why not make money doing something you love to do, who wouldn’t?  But why would the IRS care if I make money doing something I love to do?

PROFITS!  DEDUCTIONS!  TAX!

It is perfectly normal, and somewhat typical for a person to turn a hobby into a business.  When they do so of course they need to treat it like a business and keep receipts, track all business activities (your separate business checkbook), and filing a tax return, (which depends on what type of business entity you have).  You do this, the IRS will be happy and leave you alone.

However, there are some folks out there, and I’m sure no one reading this blog would be one of them, that would treat a hobby as a business so that they may right off their expenses.  Lets take the photographer as an example once again.  It’s been a hobby of yours for years and you are getting more and more into your hobby.  Someone may suggest to you “hey, why don’t you start up a business so you can write-off all that equipment”.  Sounds brilliant hey?  In order for you to be able to write off legitimate items, you have to have a legitimate business.  A business is defined as A commercial activity engaged in as a means of livelihood or profit, or an entity which engages in such activities. You are expected to make a profit, or you are making your livelihood from this business.

You simply can’t call a hobby of yours a business to merely write off expenses associated with that hobby.  Don’t even think about it!


 

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