Operate Your Activity as a Business, not as a Hobby
A business, according to the IRS, is any activity conducted on a regular basis with the intent to make a profit. But you are not required to make a profit in order to claim tax deductions. In order to be a business you must have a product or service that you offer regularly to the public. For tax purposes, you are a business if you sell or attempt to sell a product or service whether you actually call yourself a business or not. Your business is born the day you first offer your product or service for sale.
Intent to make a profit is what differentiates a “business” from a “hobby.” A hobby is an activity that may produce income, but is operated primarily for pleasure without the intent of making a profit.
As a business, you may deduct all of your ordinary and necessary operating expenses, no matter how great or small your income from that business. If you have more income during the year than expenses, the difference is your taxable profit. If you have more expenses than income, the difference is your excess tax loss and can be used to reduce the taxes due on your other income.
If you are running your activity as a hobby, you may still deduct your expenses, but only up to the amount of your income. Therefore, with a hobby there can be no “loss” for tax purposes, but you can still take all of the same tax deductions as in a business as long as those deductions don’t exceed the income. Don’t believe those who tell you that you get no deductions if your activity is a hobby.
You can show your intent to operate as a business instead of a hobby by:
• Talking regularly to potential or actual customers and keeping a list
• Opening a separate bank account in your business name
• Having a telephone, even at home, in your business name
• Keeping good records of income and expenses
• Printing business cards, fliers, or brochures about your business