Are you looking to turn a hobby into a business? Do you want to grow your hobby into something more? Have you already succeeded in doing so?
When it comes to personalized tax or business tax, you need to know what you must pay and how to file your taxes the right way. At Borshoff Consulting, you need to look no further, as we have the experience, expertise, and education to help you file and pay your taxes the right way.
As you look at whether your hobby is a business or not, you might wonder how you will report this source of income. This article will show you all of the information you need to know in order to do these things correctly.
In fact, in this article, we will look at three things: what a hobby is, what happens when a hobby turns into a business, and how to report all this on your annual tax return.
Let’s dive in to learn more about making a profit and paying taxes!
What Is Considered to Be a Hobby?
Most people engage in hobby activities – a sport or recreational activity that is enjoyable to a person would count as a hobby. It is fun to do things you enjoy doing, after all. What if you could make money off that thing that you enjoy doing the most?
If you are a crafty person, you might enjoy knitting, crocheting, quilting, or doing a variety of other creative and artistic tasks. You might wonder what the IRS considers to be a hobby.
There is a big difference between a hobby and a business, according to the IRS. A hobby is defined as an activity that someone pursues out of enjoyment with no intention of earning a profit. If you hope to make money from your hobby, it is another story altogether.
So, if you go surfing on the weekends for fun, you are likely not doing this to make a profit. Also, you are likely not making any money from this sport. Therefore, you do not have to report this on your taxes.
However, if people give you money to surf on the weekends, you would need to report this income on your tax return.
You probably have plenty of hobbies that you do just for fun. Do you make additional money from any of them? Do you have a supplementary income? Is it taxable?
Understanding the difference between what is taxable and what is nontaxable can help you here!
Is Your Hobby a Business?
The first thing that you will need to determine is whether your hobby is actually a business or not. If you work on your hobby frequently, it could be a business or a side hustle. A side hustle is anything that you do “on the side.” Likely, a sport or hobby is a side hustle.
If you have made a profit in three of the last five tax years with your hobby, the IRS would probably classify your hobby as a business. You will also need to report any hobby income on your tax return.
If you’ve determined that your hobby is a business, things can get complicated. For example, as business owners, you will want to report the income you earn and even pay employment tax when applicable to avoid penalty and interest on past-due taxes!
Make sure you get a business consultation with a qualified tax professional to determine how you will file your taxes as a business owner and how you will pay any taxes you owe.
What if you are starting a business that was previously your favorite hobby? How does that work when it comes to your taxes?
Another great question is, how can I turn my hobby into a small business?
How to Turn a Hobby into a Business
There are at least two requirements when it comes to turning a hobby into a business. First, you must pass the IRS “hobby to business” test – meaning your hobby must meet nine factors that the IRS deems necessary for a business.
Sometimes, we have to invest money in our passions to make money from them! It’s not always fun starting out, but the rewards of the finished product are well worth the pain and suffering in the beginning!
How to Pay Taxes on Hobby Income
You will file Schedule C with your tax return (usually IRS Form 1040) to report your business income and expenses and any hobby income you need to report.
You might want to deduct hobby expenses on your annual tax return, but maybe you do not know if this is possible or know if you can for the product or service that you plan to sell!
To be eligible to deduct hobby expenses on your tax return, you will need to first understand that the IRS does not allow hobby expenses to be deducted on tax returns. Rather, your business expenses can be deducted, but they will need to be ordinary and necessary expenses.
This means that the expenses you incur are an ordinary part of doing business for your industry. The expenses must also be necessary for your business to continue surviving. They cannot be leisurely expenses that you enjoy but do not need for your business!
When it comes to turning a hobby into a business, you should aim for the best tax breaks each year! Meet with a qualified tax consultant to get the most out of your tax return! Since you will want to do things right, you should consult with the best!
Conclusion
If you have questions on turning a hobby into a business or how to report hobby income, be sure to contact us! We’d love to add you to our list of satisfied customers!!
You can trust Indiana’s tax expert – Sherry Borshoff! She will steer you in the right direction. Whether it is about keeping up with the latest news on tax reform or even just helping you file your taxes, Sherry has the expertise and experience to help you every step of the way!!
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