Having a business is a dream of many and is realised by the determined. It takes time, effort and perseverance to set up any business and if your heart is not properly in it, then your business risks failure. Passion comes from interest and interest is often in the form of a hobby. When you have a passion for something, you can generate much more success compared with someone who is running a business solely for the profit that it can provide, you can think of taking your business to the next level.
It does have to be remembered however that if you profit from your hobby in any way then it may be considered by the IRS to be a business and every business would have to be prepared to submit their earnings to the IRS for processing.
The IRS have very clear rules and regulations, some of which can be quite complex and difficult to understand and so it is therefore very easy to fall foul of them. If you happen to do that, the consequences can be very serious indeed and there is often no room to manoeuvre. Ignorance of the rules is not excusable when it comes to dealing with the legalities associated with the IRS, you have to get it right. Take time to speak with someone who is versed in all of the rules if you are not as the alternative could result in you having to pay hefty fines if proper declarations are not made. It is very important that you are aware of when a hobby in actual fact becomes a business. You may consider what you do as a hobby but do not assume that the IRS will agree with your position on that.
You are normally able to deduct expenses associated with your hobby on your tax return but only up to the value of the profit being made from the hobby. So, if for example your hobby generates £500 in profit, the expenses for which you make claim cannot exceed that amount. If they do, the ‘hobby loss’ rule applies.
It very much will depend on whether your operation is considered a business or a hobby as businesses are not bound by the same set of criteria by the IRS and it is expected that businesses will run at a loss until fully set up, which can in fact take a number of years.
If you think that you could be affected in this way with your business considered a hobby, it is important that you put measures in place so that if a challenge were to arise, you will be prepared. If you are working full time in another position or job, this could be very important. Make sure that you have all of the important and proper documentation to support a business, have a business plan and separate bank accounts. Make sure that you can show what you are doing to make your business a success as you could very well be asked to do this if you declare a loss associated with what the IRS consider to be a hobby.