Many small businesses are started when someone turns a personal interest into a money-making endeavor. But what’s the difference between a hobby and a business? And why does it matter in the first place?
As with many tax questions, it’s complicated, but Kay Bell at the Bankrate tax blog has a great rundown of the rules to keep in mind.
The IRS defines a hobby as an activity you pursue without expecting to make a taxable profit. Basically, you do it because you like it, regardless of the cost.
But if you demonstrate that you are involved in an activity with the expectation of making money on it, the IRS will consider it a business. As such, you’ll be able to deduct expenses directly from your income. You even can deduct overall business losses in the years you don’t turn a profit.
You must, however, make the right moves to convince the IRS that your sideline is a legitimate business.
And as always, know that we’re here to help you navigate all these rules and much more!