It’s a matter of work vs. fun, right? No, the difference – at least from a tax perspective – is that you can fully deduct business expenses from income. Under the new tax law, you can’t deduct any hobby expenses.
No single factor is determinative, but you’re probably operating a business if:
- You have a profit motive.
- You keep accounting, inventory, and other records.
- You invest significant time and effort.
- You need the income you make from it.
- It’s been profitable for at least three of the past five years (two out of the past seven years for horse-related activities).
- You’ve conducted similar, profitable activities in the past.
- You expect assets that you use to appreciate in the future.
- You consult professional advisers to help improve profitability.
Many businesses start as hobbies. If you want to make the formal transition to a business:
- Write a business plan.
- Open business banking accounts.
- Begin collecting state sales tax (if applicable).
- Choose a business entity.
- Engage a CPA and other advisers.