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How to Tell the Difference Between a Hobby and a Business

There are many reasons you might be in the market to start a business. Because running a business often requires that you be skilled at what you do, many people find themselves enjoying it. This can make it hard to tell whether this activity is actually a business, or if it’s actually just a hobby. Because of the tax implications involved with owning a business, it is very important to know the difference between the two. Check out these tips in order to figure out whether your hobby can be considered a business.

 

How is your activity conducted?

One of the first ways to figure out if your activity will be a good business is to look at how you specifically conduct it. If you maintain accurate books and records related to your activity, this might be a sign your hobby is already on its way to becoming a business. This is a necessary process for most businesses, so if you do this for a hobby you just might be able to turn it into a business. Another thing you should consider is if you conduct your activity the same way you do with similar profitable activities. This is another good sign that you could potentially turn this hobby into a business.

Are you doing anything to be profitable?

Another great way to determine if you’re able to turn your hobby into a business is if you are actively trying to make it more profitable. This can involve things like advertising or promoting the activity. Maybe you’ve found yourself advertising for your fitness class lately? Or perhaps you’ve begun to promote your artwork much more than you previously did. These are just some examples of things you might do to make your activity more profitable.

A similar way in which you might be trying to be more profitable with your activity is by working more to secure supplies or products that are necessary for it. There might be an increase in demand for a service you’re offering, or maybe more people are interested in what you’re doing. Regardless, increasing the supply for something that funds your activity could be a sign that it’s becoming more of a business.

How well do you know this activity?

If you’re trying to turn your hobby into a business, it’s of course necessary that you be knowledgeable in how it works. This means you should know how other similar businesses are run and the different practices they perform. If you find that you’re not doing anything different from these businesses, this is a good sign that you can turn your specific hobby into a business as well. This doesn’t necessarily mean the hobby needs to be the exact same as another business, but there should be some similarities.

Is this activity a main source of income for you?

A great sign that your hobby has the potential to be a business is if it is one of your main sources of income. If you find yourself spending a good portion of your personal time doing it outside of just personal or recreational reasons, you may already be running a business without knowing. Full-time or part-time hours spent on it are a good indicator that you’re spending a large portion of your time on it.

Are you making, or do you plan to make a profit?

Have you made a profit from doing your hobby already? Perhaps you’ve made plans to make a profit in the future. If this is the case, you may be able to turn your hobby into a business. This also applies to activities that will become more profitable on their own in the future. If you have the potential to make substantial profit from your hobby, you just might be in the market for running a business.

Losses can be an indicator as well

Have you had losses from your hobby that were outside of your control? These also might be losses that are just a part of starting the activity. If the activity is usually or potentially profitable, you may have some grounds to turn it into a business.

Claiming profits and losses

Keep in mind that in order to use a loss from your activity to offset your income, you need to be actively trying to make a profit from it. If do receive income from an activity without having any intention to make profit, be sure to report that when you file for your taxes.

Test your knowledge on this article with this quick trivia game!

This article is based on the IRS’s fact sheet.

Anthony Martin

Anthony Martin is currently a college student at the University of Central Florida. He is majoring in Digital Media and has a background in computer programming. Anthony has studied many different computer programming languages and uses his familiarity with HTML/CSS to assist him in writing articles for and maintaining the website.

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