So you’ve had a hobby for years that has generated some income and now you’d like to turn it into a business, qualifying for tax deductions.
The IRS has several tests.
The basic rule is businesses operate to make a profit, while people engage in a hobby for sport or recreation, not to make a profit.
But hobbies becoming startups has become quite common and can happen in various ways.
The important question to ask is how can one go from hobby to business without an IRS headache?
Here are some tips.
Brainstorm all the ways you could make money from your hobby – You may have to do more than one thing to create a sustainable business.
Be sure you’ll still enjoy your hobby if you’re doing it for money – You don’t want to get burned out on doing something you once enjoyed.
Get really good at what you do — Before you quit your job – To make money at something, you have to be good at it.
Write a business plan – Evaluate the market and make sure this is a viable option.
Adopt a business mindset – Hobbies are for leisure, if you want to turn yours into a business you have to treat it as a job.
Learn about marketing – You can be the best in the world at what you do, but if you don’t market your business, you’ll never get customers.
Create a brand and stick to it – A strong brand helps your loyal customers recognize you.
Keep records – This seems like a no-brainer but it is easily overlooked especially in the beginnings of creating your company.
Open up a separate credit card – Creating an account that is dedicated to your business will greatly simplify your record keeping.
The general IRS rule is to post a profit in three years out of five. But there is another safe harbor: “Are you doing things to try to make money even if you are not making money?”
An example of this would be the boxer Joe Frazier. He had a money-losing farm in Brewton, SC, but was denied business deductions. However, Frazier said it was not “a hobby farm” the intent was to make money, it simply wasn’t successful.
Frazier was able to knock out the pesky tax man in court and restored his deductions.