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Turn Your Hobby Into a Business
Everyone on this planet that I know of has a hobby. These are things we do on the side for entertainment, for our health, or to earn extra money. We live in a time now where anyone can monetize their hobby and turn it into a business.
Some of these hobbies would have been considered impossible to make money from back in the day. However, they are now possible due to various social media platforms.
But from a tax perspective, how do you turn your hobby into a business? That is what we will discuss in this blog post.
What is a hobby?
If you’ve read our previous blog post, “Your Ultimate Guide To Stay On Good Terms With The IRS,” then you’ll know that for a business to be able to write off taxes, they have first to prove that they’re in business to make money.
On the other hand, a hobby to the IRS is something a person does when they are not in the person does when they have no “reasonable expectation” to make money. Notice that they say “reasonable expectations” what does that mean?
Some people don’t like vague statements like “reasonable expectations,” but that is good. The IRS said they couldn’t define exactly how a business should behave to make money, which means that everything is up to interpretation.
So technically, practically any hobby you have can be interpreted as an income-producing business. However, there are some things you will have to have in place first.
What do I need in place to convert my hobby into a business?
You’re a very talented person. You might have a passion for teaching your friends how to do exercises at the gym, performing at bars, babysitting your favorite nieces and nephews. Still, until you turn that hobby into a side business, you will never be able to write off any business taxes.
There are eight steps you need to do to turn your hobby into a business that the IRS recognizes. Keep reading to find out what these eight steps are!
Step 1: Run your business like a business
This means you want to have the character traits of a business. This means having things like:
- Have a website
- An email address and a phone number for clients to reach you.
- Have accurate books and records
- Something to categorize your expenses
These are all common things that we as consumers look for when determining a business is legit. Generally, 80-90% of businesses already have these basic requirements.
Of course, having every single one of these things on the list is not a requirement, but it does help the IRS believe that your business is more than just a hobby.
Step 2: Study your industry
Learn how to become an expert in your industry. There is so much free information on the web of your industry. All it takes is a quick Google search to find articles about your business.
Another important thing is associating with other experts in your field. Connect with them on social media, follow them, and create groups of your own to network.
Step 3: Put in the effort
Have a journal showing consistency in the hours you work in your business. This indicates that you’re putting effort into your business to make a profit.
Even if you made $0 in profit last year, the IRS wants to see that you’re doing things to change that and make a profit.
Step 4: Have a vision of growth.
What would your business look like in the next 5-10 years? Then make a plan of how you will get to that desired outcome in your company.
That plan has to make sense and is reasonable.
Step 5: Show a pattern of success
Do you have a track record of being successful in this industry?
For example, have you worked for someone else’s business where you used the same skill set that you’re doing now?
Have you made any sales or closed any deals in your own business?
This is all about proving you can actually run your business.
IF this is a hobby you have been doing for a while and have seen profit from it in the past, then that alone is proof you can do it!
Step 6: Have a documented time frame for profit.
Most businesses can say when they expect to be in profit. Having documentation shows that you have a business that is serious about making a profit.
The IRS looks at your business and is trying to figure out your long-term intent. Most people who have hobbies do not plan out how they will make a profit with it over the long term.
Step 7: Show at least a dollar profit.
Your business can go two years without any profit and claim losses before the IRS steps in to examine your business. If you went 3-5 years without any profit, the IRS would begin to question if you own a business or a hobby.
However, say you went two years without profit, but then you made $1 on your 3rd year, then you’re considered a business, and the IRS won’t have legal grounds to question your business.
Step 8: Do not enjoy what you do.
Does the activity lack elements of personal pleasure or recreation? If the activity you do has any personal elements, it can be considered a hobby by the IRS.
These are the eight factors the IRS will look at to determine if your hobby is a business or not. Remember, the IRS believes a hobby is an activity you do that has no real reasonable expectations to make money.
However, when you can implement these eight steps, the IRS will have no choice but to believe you’re running a business.
Be sure to take a moment and check out our next blog – How To Write Off Any Business Expense Without Getting In Trouble With The IRS – Ask Yourself These 4 Questions