Comments on: When Does My Hobby Become A Business?

By: Lorelei56

Lorelei56 — Tue, 17 Feb 2015 13:10:02 +0000

Just out of curiosity (I’m in the same boat – preparing to get a license but not knowing the ins and outs of taxes, etc.), what happens at the end of three years when you still haven’t made a profit? Do you have to give back all the business deductions you took during the three years? Do you have to give up your business license? Or just get bumped back to hobby status where you can’t get any deductions but still have to pay taxes on your income?

By: Heather

Heather — Sun, 03 Mar 2013 22:29:51 +0000

Thanks so much for all of the thoughtful responses! I feel much better prepared for the types of bookkeeping I’ll need to do this year to be ready for tax time next spring.

By: Jeanine

Jeanine — Fri, 01 Mar 2013 16:55:13 +0000

All good advice. The IRS has the definitive bottom line, but also, depending on where you see this going and how much effort you put into it, consider a CPA. Depending on individual circumstances, a CPA could successfully defend a business showing losses for more than three years. They also know the ins and outs of how to do business in your area and can help with sales tax questions. Finally, their experience and relationships with IRS and state tax agents is invaluable should you be audited. I speak from experience…my husband and I are both CPAs, and he has been in tax practice for 40 years.

By: Jan Hansen

Jan Hansen — Tue, 26 Feb 2013 18:48:39 +0000

Hi Heather – I’ve had an online business since 2003 and I’ve always felt that it was a business as opposed to a hobby. My husband, on the other hand, feels that if I were able to support myself on the income I receive then it’s a business but if not – it’s a hobby. In the beginning I DID get a Sellers Permit because I wanted to make it an official business. Once you do that, in the eyes of the IRS, you’re IN business and your on their radar. But, one of the benefits of being a real business in the eyes of the IRS is that you CAN deduct expenses. You are also allowed to show a loss for up to 3 years. So, bottom line is – if you feel that your hobby can grow into a profit-making venture, get a Sellers Permit (which will allow you to buy supplies at wholesale and buy items tax-free) and start filing a Schedule C each year with your regular income taxes.

By: Diana

Diana — Tue, 26 Feb 2013 18:11:05 +0000

I have a small home based business, and just finished my 2012 taxes-the upside is that I am retired and my business is really a ‘hobby’ since I have a loss each year. Go to http://www.irs.gov and read the instructions for Schedule C which pertains to doing business at home. I also used Turbo Tax/Tax Slayer online (free) to do my returns. That was very helpful as they asked all the right questions. Judging by what you said-spending $400.00 and making only $80.00-you should be able to claim a loss. Be sure to keep accurate records for coming years if you intend to continue.

By: Val

Val — Tue, 26 Feb 2013 14:14:01 +0000

Hi Heather,
I second what Janice says. If you do your own taxes, I would suggest Turbo Tax for Home and Business. This is what I have been using for years. Along with my personal W2 and expenses, it also asks me all the right questions regarding my jewelry business. All my expenses and income are entered into there. Unfortunately the IRS does expect all hobby income to be claimed which means you can certainly write off those expenses.

By: Janice Bowden

Janice Bowden — Tue, 26 Feb 2013 11:11:31 +0000

I know this comment comes rather late after your post so I don’t know if you’ve found information elsewhere. However, for what it’s worth and if it helps you, the IRS has a great deal of helpful information on their website. Search small business and they will list their guidelines for determining whether it’s a business or a hobby. The simple answer is if you are actively working it and treating it as a business, working to make sales whether you do or not, keeping business records, separating business income and expenses from personal, etc., then it becomes a business.