Does Your Hobby Qualify As A Business To The IRS? Here’s Everything You Need To Know.

 

It has become both trendy and common for Americans to have a full-time job during the day and a hobby or a “side hustle” during free time. Especially during quarantine due to the pandemic, many have picked up new hobbies or started doing things for fun that they haven’t done in years due to newfound free time. 

 

For example, people who usually didn’t have time to craft are now knitting and painting more than ever. There are people that have always wanted to learn to play the guitar and they’re finally doing it. But what happens when those crafts start being sold on a site like Etsy, or the new guitar player starts teaching virtual lessons for payment? 

 

A hobby turned side business can be a great source of extra income, but do you have to report these earnings to the IRS? The IRS has created a guideline to distinguish the difference between a hobby for fun and a hobby for profit. Here’s everything you need to know. 

 

The Difference Between A Business & A Hobby

 

The difference between the two is that an actual business with the intent to have profit can claim a loss against other income on a tax return, while hobbies cannot.

 

Hobbyist

 

Let’s say that a person buys a dog and starts an Instagram account for the new pet. The dog suddenly gains popularity, and now the account is making money from sponsorships and other paid promotions. 

 

These earnings are considered taxable income, and the expenses associated with the dog and the Instagram account are considered deductible expenses. However, if that person incurs a loss from that hobby, it cannot be deducted against taxable income – essentially, the business reports a “break even” on their tax return.  

 

Small Business Owner

 

A business differs from a hobby several ways, but a big one is that if a business generates a loss for the year, that loss can offset other taxable income. This gives the taxpayer the opportunity to lower their taxes owed for that year. Of course, the IRS does not want to see you report a loss year after year; so there are guidelines as to how many years a business can claim a loss, dependent on the type of business.  

 

Do you have a hobby or business that you still have questions about? We can help! 

 

Taking a do-it-yourself approach increases your odds not only of making mistakes but of missing tax strategies that could potentially save you hundreds or even thousands of dollars. Our talented team at Taurus CPA Solutions live and breathe tax law and planning; let us handle your business’s tax preparation, so you don’t have to.

 

If you would like to learn more about how Taurus CPA Solutions can help your small business, please contact us today. Follow us on Facebook and LinkedIn to keep up with our latest news, visit our website, or give us a call at 410-465-4600. We look forward to connecting with you!