Tuesday, August 18, 2009

Hobby vs. Business: How to Classify your Summer Business

Summer Jobs or Summer Hobbies? What's the difference, and why is it important? Over the summer, many people take on small odd jobs for profit. Sometimes the odd job is simply for your enjoyment, and you happen to make some profit from it. Other times, you pass out fliers, promote, and do everything you can to make the extra cash. The difference is important if you want to avoid trouble with the IRS.

Reporting all income The IRS requires that you report all income, including income made from hobbies. But what's the difference between a Hobby and a Business? Here's 8 questions the IRS requires you ask yourself to determine the answer:

1. Is the purpose of your activity to make a profit? You might have fun with your business, but you really engage in it for profit.

2. Do you participate in your activity just for fun? According to the IRS, Hobbies are purely for fun and you might happen to make a little profit from it. Business is Business, you're in it for profit.

3. Do you depend on income from the activity? The hallmark of a business.

4. Have you changed methods of operation to improve profitability? This shows that you're operating with in a business-like sense, and your "Hobby" is probably a "Business".

5. Do you have the knowledge needed to carry on the activity as a successful business? People who carry out hobbies just for fun, often don’t have the business acumen to turn their not-for-profit activity into a profitable business venture.

6. Have you made a profit in similar activities in the past? An activity is presumed carried on for profit if it makes a profit in at least three of the last five tax years, including the current year – or at least two of the last seven years for activities that consist primarily of breeding, showing, training or racing horses.

7. Does the activity make a profit in some years? You might not make profit every year, but the "hobby" could still be a "business".

8. Do you expect to make a profit in the future from the appreciation of assets used in the activity? This indicates your activity may be a business rather than a hobby.

Business or Hobby? If you determine that your business is actually a hobby, you cannot take deductions that exceed the gross receipts for the activity. But if you're conducting a business, you can make business deductions. If you want to take your hobby seriously as a business and make deductions from there, print some business cards and fliers and you're already on your way.

1 comments:

Anonymous said...

I hope, it's OK




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