Legitimate Business: Taking Your Hobby To The Next Level
Brad Smith • October 27, 2019
For some time, you’ve probably invested energy and resources into a hobby.
It could be time to think about whether your hobby is a legitimate business.
Businesses exist to make a profit serving the needs of customers. This is true of giant corporations, and it’s true for the hobbyist looking to survive solely off the profits of his or her efforts.
People with hobbies, though, may not understand when to consider their hobby a business.
Fortunately, the Internal Revenue Service
offers nine factors by which you can help assess whether your hobby could translate into a business.
Do You Maintain Records?
Maintaining complete and accurate bookkeeping and records is an indicator that your hobby may indeed be a business.
Do You Intend To Profit?
Hobbyists spend much time on and pour effort into their chosen activity. A profitable hobby suggests that you may consider turning it into a business.
Does Your Life Depend On It?
Consider your sources of income.
If your hobby is required in addition to a more traditional income to cover your living expenses, you may need to keep doing it. As a result, your hobby may be a legitimate business.
How Do You Classify Losses?
Losses incurred by your hobby may be due to circumstances beyond your control, or they may be normal in the startup phase for your business type.
Have Your Methods Changed?
If you’ve changed how you operate to increase your profitability, you may be leaning more toward a business owner than a hobbyist.
Do You Have Trusted Advisors?
The business savvy you or your advisors possess could depend on how to classify your hobby or business.
Have You Made A Profit In The Past?
Keep records, even if you think your hobby is “just a hobby.” If you’ve made a profit in years past, chances are you could continue that trend by turning your hobby into a business.
If So, How Much?
Again, recordkeeping will help you understand the financial success of your hobby. We generally say
that unless you’re generating more than $50,000 in revenue, you are probably dealing with a hobby more than a business.
Additionally, how much you make could determine what type of business
you create.
Will Your Assets Appreciate?
The final factor the IRS lists is whether the assets you use for your hobby will appreciate to the point that they turn a profit.
None of these factors are decisive, says the IRS. All facts and circumstances must be taken into account.
Consider these factors as you evaluate whether to convert your hobby into a legitimate business, or keep it the way it is.
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