Hobby versus business
Hobby versus Business
There isn’t a single factor that can help you determine the difference between a hobby and a business but this blog post will help you understand the key differences between a hobby and a business and teach you a little bit on how to manage payments for hobbies and businesses and find out where to go for more information.
Many people fail to identify whether they are carrying out a hobby or a Business and most of the complications and questions come in when it’s time for taxes or when they are problems with the IRS.
The key differences between having a hobby and a business are your tax, insurance and legal obligations. It's important to understand the characteristics of businesses and hobbies to ensure you correctly determine what your activities are. According to the IRS, a hobby activity is an activity not done for profit. This includes activities done mainly for sport, recreation, or pleasure. No one factor alone is decisive. A business on the other hand is activity carried out in order to earn a profit or to make a living.
Below are Factors to consider in deciding whether you are conducting a business or hobby according to the IRS
Whether you carry on the activity in a business-like manner and maintain complete and accurate books and records.
Whether you have personal motives in carrying on the activity.
Whether the time and effort you put into the activity indicate you intend to make it profitable.
Whether you depend on income from the activity for your livelihood.
Whether your losses are due to circumstances beyond your control (or are normal in the start-up phase of your type of business).
Whether you or your advisors have the knowledge needed to carry on the activity as a successful business.
Whether you were successful in making a profit in similar activities in the past.
Whether the activity makes a profit in some years and how much profit it makes.
Whether you can expect to make a future profit from the appreciation of the assets used in the activity.
Why it is important to know whether you are conducting a business or hobby
Conducting a hobby or a business at the end of the day affects your tax liability. If the IRS declares your venture as a hobby, you can’t deduct business losses and expenses on your tax return. You can only deduct your hobby expenses up to the amount of income you earn.
Allowable Hobby Deductions. Within certain limits, taxpayers can usually deduct ordinary and necessary hobby expenses. An ordinary expense is one that is common and accepted for the activity. A necessary expense is one that is appropriate for the activity.
Limits on Hobby Expenses. Generally, taxpayers can only deduct hobby expenses up to the amount of hobby income. If hobby expenses are more than its income, taxpayers have a loss from the activity. However, a hobby loss can’t be deducted from other income.
How to Deduct Hobby Expenses. Taxpayers must itemize deductions on their tax return to deduct hobby expenses. Expenses may fall into three types of deductions, and special rules apply to each type.
By now I hope you have idea as to whether you are conducting a hobby or a business and for further understanding I would suggest you visit the IRS official website www.irs.gov