I can’t do it.
How many times have you said that to yourself?
You enjoy your hobby — maybe it’s making custom jewelry or quilts, or dog training or home decorating. But making the switch from a hobby to a business is no small task.
And in fact, it’s one area that the IRS flags and often audits. So how do you separate your business from a hobby?
In order to keep yourself off that radar, follow these simple steps to cover your bases with the IRS.
What the IRS looks for in tax returns that report business income
One red flag area for the IRS is when individuals claim that they’re running a business in order to write off their hobby expenses.
They will look to see if you intend to make a profit in 3 out of 5 years.
You don’t have to actually turn a profit — you just have to show that it is your intent.
In order to keep things clear when you separate your business from a hobby, we suggest that you do the following:
- Have a business plan
- Work in the business on a regular basis (at least 1 hour a day, 4 days a week)
- Act like a business, including printing business cards, advertising your products or services and keeping an appointment and activity calendar.
There could be times that your business activities look like hobbies. For example, if you travel for it, spend time writing for it, or otherwise spend time in areas that may look more like hobbies, continue to document your intent to make money.
Proper documentation will always keep you in the clear with the IRS.
You’re still free to report any losses you incur while starting your business. Just be sure your business intentions are clear from your activities.