Side Hustle or Hobby?

If your deciding on whether you should pursue your hobby as a business, the answer is absolutely! Having a business means all the expenses related to your craft are most likely tax deductible. It opens up the possibility of a home office deduction which helps offset your overall taxes. Whether your full-time gig is being a stay at home mom or working a paid job, turning your hobby into a side hustle is a no-brainer.

By starting a business, you will now get paid for whatever it is you feel passionately about. If your 9-5 isn’t fulfilling the feel good life you envisioned or having children has made you forgot who you are outside of being a parent, setting aside time to get your creativity flowing will spark a sense of greater purpose for you. Starting your own business and achieving even the smallest successes is empowering.

One of the most obvious benefits of turning your hobby into a profitable business is having extra dollars each month. These dollars will mean a step towards the financial freedom most of us wouldn’t mind having. It also means if something happens with your 9-5 you have a backup plan.

So, what makes a hobby a side hustle? The general rule is if your business shows a profit for two out of the last five years then it can be classified as a business. There are other important factors the IRS considers when determining if your hobby is in fact a business.

Here is the IRS provided list of aspects of your business activity they review to determine if your side hustle is a hobby or ‘real’ business:

• Whether you carry on the activity in a businesslike manner and maintain complete and accurate books and records.

• Whether the time and effort you put into the activity indicate 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 change 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.

Did any of items on the list leave you wondering - what does that mean? A good tax pro will make sure you have a complete understanding of what these factors mean to your business.

What are you waiting for? Go pursue that dream job and fulfill the need to do more. Bring passion to your day to day life. A happier you is a better you!

Have questions? Get answers! Whether you’re ready to get started or just need help with a plan, schedule a consult!