You wouldn’t call your business a hobby, right? The IRS has specific parameters for whether an operation is considered a business or a hobby. This is especially if your industry is mainly a hobby, such as equestrianism. What helps you to distinguish yourself as a business?
For starters, you have to treat your operation like a business. This means keeping records of income and expenses, hiring a bookkeeper ?, and you or your advisors have the knowledge to create a business. You expect to make a profit from this business, even if you don’t expect it until the future.
It can go even deeper than this. You have to have a personal motivation to be building this business (because no one puts themselves through the struggles of entrepreneurship to ‘have fun’ ?). You’re putting effort into this business and possibly rely on the income for your living expenses. The IRS will also look at whether you were successful with another business prior to this one.
The benefits of running a business, rather than just having a hobby, is that any expenses or losses that were out of your control can be deducted from your taxes.
So while this may not apply to most small businesses, those industries that are normally considered hobbies, such as yarn workers, smaller “hobby” farms, and artists, have to make sure they do their due diligence to make sure they’re considered a business, such as keeping records and tracking expenses. It’s also probably important to have a business plan written up as an additional protection.
Check out this link to find out more about hobbies vs. business.
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