Have you started your side-hustle or thinking about starting one? If so, it’s time to determine how to turn your side-hustle from hobby to business.
Whether you’re an online influencer, travel blogger, artist or musician, you need to know your status and if the IRS recognizes your hobby as a business. This is important in determining if you need to file taxes.
So, let me explain the difference to you!
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When Does a Hobby Become a Business?
The Hobby vs Business Test
To help you understand if your activity can be considered a hobby or business, I will provide some rules and guidelines.
In order to make this determination, you should consider the following factors:
- Does the time and effort you put into your activity indicate an intention to make a profit?
- Do you depend on income from this activity?
- Are there losses? Are they due to the circumstances beyond your control or did they occur in the startup phase of the business?
- Have you changed methods of operation to improve your profitability?
- Do you or your advisors have the knowledge needed to carry on the activity as a successful business?
- Have you made a profit in a similar activity in the past?
- Does it have the ability to make a profit in the next few years?
- Can you expect to make a profit in the future from the appreciation of assets used in the activity?
If you have answered yes to a few of these questions, then you’re on your way to having a successful business. A great sign of pursing your passion and making money from it!
Typically, the IRS considers an activity for profit if the business makes a profit at least three of the last five years. This includes the current year and the last two years of the last seven years for the activities where you are actively participating in growing your business.
If you realize a loss happened in the operation of an activity or business, you are allowed to deduct loss from income. If the business or activity is considered a hobby, you cannot use a loss to offset income.
Hobby expenses are limited and can be deducted as an Itemized deduction on your tax return.
See IRS publication 535, businesses commences for details on hobby expenses deductions.
Your overall goal should be to make it a full-time business even if you don’t qualify for it this year.
Don’t give up!
Continue to live out your dreams and work really hard to turn your passion into sustaining income.
I hope this article helped you gain some control of your tax plan this year. Remember not to stress out. Let me know what side-hustle you have in the comment section below!
If you want more handy tax tips, then feel free to check out my latest articles here. Sign up to get on the waiting list if you’d like to file with me.
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