What do you do with your downtime? Most of us have a pastime, whether it’s baking, home maintenance, or crafting.
But how do you know if it’s a hobby or a business? And does it matter?
The thing about a business versus a hobby is that with a business you have tax, insurance, and legal obligations.
Suddenly, that little side hustle seems a little more complicated than you’d previously thought. Well, don’t worry. BAAP C.P.A. can explain the difference between a hobby and a business, reveal the top things to consider, and advise on what steps to take.
The golden rule is that an activity is considered a business if you pursue it with continuity and regularity, and your primary purpose is to generate income or profit.
The IRS said that “A hobby is any activity that a person pursues because they enjoy it and with no intention of making a profit. People operate a business intending to make a profit. Many people engage in hobby activities that turn into a source of income.”
Now that we know the difference, let’s look at 11 factors that taxpayers must consider when determining their activity to be a hobby or a business, according to the IRS.
Let’s remember that all of the above factors, facts, and circumstances relating to the activity must be considered, with no factor being more important than the other.
It’s important to understand that if you make an income from an activity that’s completed with no intention of making a profit, you must report the income you receive.
The IRS state that “whether it’s something they’ve been doing for years or something they just started to make extra money, taxpayers must report income earned from hobbies on next year’s tax return.”
The area of tax can be complicated. If you need more guidance, we can happily answer all of your questions.
We serve the Tampa Bay Area and specialize in tax management, accountancy services, financial statement preparation, and financial advice. We help our clients to reach their future goals by becoming better organized and more efficient in managing the financial aspects of their business.
We believe that it’s all about tax planning, not tax preparing. Let’s set up a free strategy session to talk about what steps you can take to ensure a compliant and secure financial future.
We’re your business advisors, and we’re ready to unlock the potential of your business.