When Does My Hobby Become A Business?

by Heather.

I started making jewelry a couple years ago, just for the creative outlet. I inherited a bit of money that enabled me to get started with some supplies, but I quickly realized that my teaching salary was not going to keep up with all that I wanted to create, so I’ve sold some pieces to friends.

I created a webpage for sales via Handmade Artists, but I’d really like to start doing home jewelry parties and craft fairs. The craft fairs & farmer’s markets want tax/ retailer licenses, and I’m not opposed to getting those, but I wonder if it’s necessary if I stick to only home shows and selling to friends (the website hasn’t done anything so far, and, for now, I’m ok with that).

My immediate question is in regard to 2011 taxes. I spent about $400 on supplies and made $80. It’s hard to imagine the IRS would consider me a business (especially because I haven’t sent in any paperwork for licensing), but I want to do this right, and it would be nice if I could claim some of my expenses (even though the major spending was done and not claimed a few years back).

This has become much longer than I intended!

My basic question is at what point does one cross the line from hobby (with occasional sales) to a very small business?

Thanks for any insights!
Heather

Heather