Do You Have a Business Or A Hobby?
Of all the hardships that have come out of the COVID pandemic, there have also been some interesting upsides. Early isolation mandates forced people to step out of their busy lives for weeks or even months and find new hobbies and activities to entertain themselves. In some cases, those hobbies turned into full-fledged businesses. Whether you started a farm, are making jewelry, or anything in between, it's essential to know whether or not you're running a business or dabbling in a hobby so you can accurately represent any income to the IRS.
One of the key questions that you need to answer to determine whether you're running a business or dabbling in a hobby is this: do you intend to make a profit? Are you making a product with the express purpose of bringing income into your family? If so, you're running a business.
The following is a list of factors compiled by the IRS that make your hobby a business.
You carry out activities in a "businesslike manner" and maintain good financial records.
You put time and effort into the activity with the intent to make it profitable.
You depend on the income you generate for your livelihood.
You change your methods of operation to improve profitability.
Any losses are due to circumstances beyond your control or are standard for the startup phase of your type of business.
You have the knowledge needed to carry out the activity as a successful business.
You were successful in making a profit in similar activities in the past.
If the following things are true, you have a hobby.
Your motivation is general enjoyment or relaxation.
You have enough income from other sources to fund your hobby.
Having a hobby doesn't preclude you from having to file your hobby income with the IRS. If you receive income from a hobby you did not intend to receive, you must still report it to the IRS.
Not every hobby needs to become a business. We all need to maintain activities that bring us joy and don't bring us a dime of income. However, if you want to turn your hobby into a business, it's essential to do it legally and properly. At Fix-It Accounting, we have a lot of experience creating business entities for Florida business owners, and we'd love to help you as well. Whether you need to determine the status of your new passion or need our help making it a legitimate Florida business, we can help. Contact our office today for more information.