Everyone has a hobby.
Hobbies are activities you do in your past time to have fun and enjoy life. But what if you could turn your hobby into a business? That means you could do what you love while making money simultaneously.
According to the IRS, that might be possible if your hobby meets certain criteria.
In this blog, I will list eight steps you can take to turn your hobby into a profitable business that even the IRS will acknowledge. That way, you can take advantage of all those juicy business tax write-offs.
What Is a Hobby?
For a business to be able to write off taxes, it must first prove that they’re in business to make money.
Why is this important?
Well, because a hobby is something a person does regardless of whether they’re making money. When people have no “reasonable expectations” to make money from their activity, the IRS calls what they’re doing a hobby.
Some people don’t like vague statements like “reasonable expectations,” but the IRS used that term for a reason.
The IRS said they couldn’t define exactly how a business should behave to make money, which means everything is up to interpretation.
This is good because it means practically any hobby can be interpreted as a business. However, there are some steps you must take beforehand.
Step 1: Run It Like a Business
This means you want to have the character trait of a business. This means having things like:
- Have a website
- An email address and phone number for your 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 if 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 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 plan 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 you’re doing now?
Have you made any sales or closed any deals in your own business?
This is all about proving you can run your business.
If this is a hobby you have been doing for a while and has seen profit from it, 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. Documentation shows that you have a business and are serious about making a profit.
The IRS looks at your business and tries to determine your long-term intent. Most people with hobbies do not plan how to profit from them long-term.
Step 7: Show At Least a Dollar Profit.
Your business can go two years without profit and claim losses before the IRS examines 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 in your 3rd year, then you’re considered a business. Therefore, the IRS won’t have legal grounds to question your business.
Step 8: No Play Zone
Does the activity lack elements of personal pleasure or recreation? If your activity 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 without 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.