It’s tax time! But this is a question that should be in your mind the whole year, not just at tax time! Are you a craft business or a craft hobby?
So for starters, what is the difference between the two? To be a business the IRS distinguishes the two by this criteria.
To know the difference between a hobby and a business, consider the circumstances of your Business or hobby.
The IRS lays out the following 9 factors that should be considered when establishing if an activity is a business engaged in making a profit:
- Whether you carry on the activity in a businesslike manner
- Whether the time and effort you put into the activity indicate that you intend to make it profitable
- Whether you depend on income from the activity for your livelihood
- Whether your losses are due to circumstances beyond your control, or are normal in the startup phase of your type of business
- Whether you adjust your methods of operation in an attempt to improve profitability
- Whether you (or your advisors) have the knowledge needed to carry on the activity as a successful business
- Whether you were successful in making a profit in similar activities in the past
- Whether the activity makes a profit in some years, and how much profit it makes
- Whether you can expect to make a future profit from the appreciation of the assets used in the activity
Many people make crafts and sell them at craft markets or craft fairs for some pocket change or maybe Christmas shopping money. This doesn’t necessarily make that a business. If you go down the list they may be very business-like during the fall, but are they willing to adjust and to grow and make it a viable enterprise? Do they put in the effort for the whole year to promote their business and make their products? Many people do, but still may be considered a hobby and not a business.
So who determines if yours is a hobby or a business? Ultimately it is the IRS when it comes to tax purposes. “The IRS presumes that an activity is carried on for profit if it makes a profit during at least three of the last five tax years, including the current year” is what the IRS guideline is for if your business is intended to make a profit.
For starters, I am not an accountant, and my advice is to hire an accountant to see if you meet the guidelines for a business. No one likes screwing up their taxes and when they get complicated you need to let a professional handle it.
There are steps you can take to become a business instead of a hobby. A business can be a great deal of hard work and stress. It can also have great rewards, and I am not talking just monetary rewards.
So how can you go from a hobby to a business? How can you ensure that you really have a business and not just an expensive hobby? Watch the video below to see my advice!
So does that make it as clear as mud?
No really does that clear it up? You have to make your craft business a business. You need to be present and focus on your goals of what you want for your craft enterprise.
Leave any comments and questions here or on YouTube. Would love to hear what you have to say!
Have a Fabtabulous Day!