It’s a matter of work vs. fun, right? No, the difference, at least from a tax perspective, is that you can fully deduct business expenses from income. Under the new tax law you can’t deduct any hobby expenses.
No single factor is determinative, but you’re probably operating a business if:
- You have a profit motive.
- You keep accounting, inventory and other records.
- You invest significant time and effort.
- You need the income you make from it.
- It’s been profitable for at least 3 of the past five years.
- You’ve conducted similar, profitable activities in the past.
- You expect assets you use to appreciate in the future.
- You consult professional advisors to help improve profitability.
Many businesses start as hobbies. If you want to make the formal transition to a business:
- Write a business plan.
- Open business banking accounts.
- Begin collecting sales tax if applicable.
- Choose a business entity.
- Engage a CPA and other advisors.