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Is Your Hobby a Business?

January 14, 2013

sourcinghandmade

business-or-pleasureIf you handcraft products and sell online, at shows, or to friends, you probably have asked yourself this question: is my hobby a business, or is it “just” a hobby?  As tax season will be quickly approaching, it’s time for you to answer this question with confidence.

A truly great small business resource is the Costco Connection (and no, I do not get any sort of compensation for writing this).  Each issue has at least one very valuable article that makes browsing the entire issue worthwhile.

Click here to read A Guide for Hobby Businesses: The IRS Wants You on page 21 of the December 2012 issue.  I encourage you to read the full page article; however, here are some key points:

  1. According to the IRS, any income, regardless of source, is taxable.  For example, if you made $500 selling handmade products in 2012, it should be reported on your taxes.
  2. Income from activities (which produce said income) can be deducted by their related expenses.  So, if you spent money buying supplies for your product in 2012, some can be deducted as an expense (though only up to the amount of income received from the sales…$500 in our example).
  3. An activity is considered not “just a hobby” if profits result in “any three of five consecutive tax years…”
  4. To be considered a business, one must prove the intent to make a profit.

Be sure to click the above link to read the entire article to ensure you fully understand the law.  For more information, visit irs.gov’s article “Is Your Hobby a For-Profit Endeavor?”

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