Business or Hobby?

51 thoughts on “Business or Hobby?”

1. Hello, I teach a devotional exercise class weekly as a hobby. Though I do charge, I’m not looking to make a profit. I only charge in hopes of covering studio rental expenses. So far I’m about $800 in the hole due to the studio rents. Two questions: 1) Am I correct in assuming I can just consider this a hobby? 2) If I am doing it as a hobby, do I need to give the studio a 1099MISC for the rent I’ve paid (it will be over $600 for the year)? Thanks!

2. Hi KB,
   Here’s a post I did about Missouri sales tax and professional photographers. Now you might be in a different state so you’ll want to check your state rules but I thought this might help you: http://robergtaxsolutions.com/tag/photography-business/

   Now, you do not need to be an LLC to be a professional photographer – that’s where you would find them listed in the Secretary of State’s records. Personally, I think being an LLC is a good idea, but you can be a photographer without forming an LLC. So it’s okay if you accept payment.

   I think it’s just fine starting out as a hobby, if that works for you. Especially if you’re not making that much. Photography is a really good example of a hobby that can turn into a business. You kind of have to feel your way into when you cross the line into being a “business” versus a “hobby.

   Here’s a couple of guidelines:

   Once you decide you’re a business – you stay a business. You can’t wiggle back and forth between being a business and a hobby depending upon how the taxes look.

   If you start receiving 1099MISC forms (basically, because you do photography for a business) then you’re pretty much committed to counting your income as business income.

   If you set up an LLC – you are a business – even if you don’t make a lot of money. The LLC is telling the world that you are a business.

   Now this is my guideline – a “Jan guideline” not an IRS guideline–meaning, it’s my opinion. I think that if you’re making more than $5,000 on your business – you’ve crossed over from the hobby into the business category.

   I hope this information helps.

3. I am looking into starting a photography business, but I’m curious as to how so many “photographers” that I know aren’t listed as a business with the Secretary of State. I want to make sure I do this legally, if I’m collecting payment and make sure that I’m collecting the right taxes, (or if I need to at all as a hobby) so I don’t screw myself come tax time. This is all new to me but basically, I have only taken photos for free as I just recenly got into it, but am now getting some interest from potential clients. Would I be better off just starting out as a “hobby” and claiming any money they paid me as other income on a 1040, until I am ready to purchase the really expensive equipment that I will need to write off as business expenses?

   Now as far as sales tax goes. If I’m ordering prints from an online lab, and charged tax on those prints, do I still charge the customer tax since they were already taxed, or just charge them a fee for my service as a photographer?

4. Hi Gerr,
   Since your business is making money from affiliate programs like Amazon, and Amazon reports those revenues to the IRS, I’d stick with the schedule C. It makes the most sense for you.

5. My husband and I file jointly, and have always taken the standard deduction, so I’ve never dealt with Schedule A.

   I have been winding down a 30-year sole proprietorship since 2011. My Schedule C hasn’t shown a profit – nor have I claimed a loss, just $0 net profit – in 4 years.

   I expend little effort these days and will be filing for SS soon, BUT my website still generates a couple hundred dollars each year from affiliate programs like Amazon, and I sell maybe $50 worth of items on Amazon Marketplace. It’s not enough to qualify for self-employment tax even before expenses!

   Since my record-keeping is streamlined and simple, and I already know this process, I don’t mind continuing to submit the Schedule C.

   Is there any reason I can’t continue to just submit a Schedule C, showing my income, my expenses, and $0 net profit? Or must I declare myself a “hobby” and start claiming the income on Schedule A if I want to avoid the hassle of an audit?

   Thanks so much for your time!

6. Hi Charlene, Yes, you may deduct your mileage. But, when claiming hobby expenses, you’re going that on Schedule A and those hobby expenses are subject to 2% of your adjusted gross income. In English that means that you’re unlikely to get any write off there. Or, if you do get a write off, it’s not much because of that 2% limitation.

7. Hi,
   Thank you so much. Your site has been so helpful to me. I am claiming income and expenses for a hobby. May I deduct mileage as an expense and use the standard business rate?
   Thank you

8. Hi Crosby,
   Labrador retriever puppies? And you didn’t post any pictures? Aww. What fun is that?

   Okay so you’re making between $8,000 to $24,000 in a year on your dogs? I could argue that’s a professional. But if you choose to count your income as hobby, I think the IRS would be okay with that also. Remember, as hobby income, the full amount goes on line 21 of your 1040 and you only get to write off the expenses on your schedule A – which usually means no write off at all.

   But I think you’re got the income and experience to qualify as a professional breeder so you could do a Schedule C and write off your expenses there. I think you’re in a nice position–you can pick which works best for you.

   I know you were looking for something a little more solid. I’m sorry but I just don’t have anything like that for you. Really you’re in a “what works best for you” situation.

9. You asked the question, “What if you breed your champion Cocker Spaniel and sell the puppies? Dog breeding is a real business, but how many litters makes you a breeder?”

   I don’t breed Cocker Spaniel’s but I’ve been breeding Labradors for the past couple of years. I’m getting up to 1000.00 a puppy with 1 – 3 litters per year. Anywhere from 8-9 puppies? Some years one litter most years 2 litters and occasionally a 3rd litter in the same year but seldom? I have not been charging sales tax, and have no business but I want to do the right thing? Just not sure where it’s defined?

10. Hi John,
    You ask a really good question. It seems to me that in your case, it truly is a hobby. One you happen to be really good at, but you still consider it to be a hobby. And that’s fine! You should report the income on the other income line of your 1040 tax return. If you want to try to claim your expenses, you would do that on your schedule A with the expenses subject to the 2% limitation rule (if you even try.)

    So when do you have to consider it to be a business? Well, I would say if you get a 1099MISC – for example if you did some photos for a business and they gave you a 1099MISC form, then you’d be forced to claim it as a business.

    But mostly you’re doing photography for individuals so that’s not really going to be an issue for you for now. So at what dollar amount do you cross the line from “hobby” to business? That’s a tougher call. I’m afraid that I don’t have a solid answer for you.

    I would think that that IRS would consider you to be a business when they thought they were losing money on you not claiming the income on a Schedule C. Now, being a photographer, once you start writing off those expenses, I’d think the IRS would want to keep you as a hobby for as long as possible. (That camera equipment is sure expensive!)

    But it’s not just the money. It’s things like having a website, advertising, using business cards. All those things are part of being a “business” versus just being a hobby. So as long as being a photographer feels like a hobby to you, then I say it’s still a hobby.

    Now, about the sales tax. There are many different opinions on that. This is my opinion–but if you do some research online, you’ll see that there are other accountants out there who disagree with me.

    My opinion is that photography is a service, not a product. The photos themselves are a product. Some states tax service as well as product – if you live in one of those states, you will charge tax no matter what. But in states where service is not taxed, you have to determine the price of the “product.” Which in your case is the thumb drive. If you hand a thumb drive to someone, then that is a product and sales tax must be charged.

    What about a computer download? I had some photos of me professionally done and the photographer sent me digital downloads. Once again, I paid sales tax on those shots. Now I paid a sitting fee where he took a bunch of photos–no sales tax on the sitting fee. But the pictures I actually bought–there was sales tax there.

    Now, if you’re are sending digital copies out of state–no sales tax. You only charge the sales tax on in-state sales (right now.)

    But do check with your local taxing authority. Sales tax rules are different in every state so you want to be sure you’re in line with what your state taxing authority wants you to do.

11. Hi Jan,

    I enjoy photography as a hobby. I took photographs of a family member for free about a year ago. After this shoot, I continue to get inquires about shoots from other people. I don’t charge very much, because I like to do it for fun and do not claim to be a professional photographer. Over the last year, I made around $1,000. It seems like the interest keeps increasing after each session and there is reason to believe I will make more each year. Can I continue to classify this as a hobby and just report the income as “other”? At what amount each year do I need to switch my classification? Also, are there sales tax implications for giving a client a thumb drive of the photos?

    I am currently a health professional as my day time job and only wish to do this as a side thing for fun. I am just confused on how I should be reporting this income. Thank you for your help, I appreciate it!

12. Hi Ben,
    it’s pretty normal for a business to have a loss in the first couple of years. And she’s clearly making progress, moving from a $15,000 loss to $5,000. Hopefully she’ll have a net gain for 2015.

    Personally, I hate the 999999 code. It’s not a red flag all by itself, but if something else gets flagged, I don’t think the 999999 code helps. I would use 812112 for your wife’s business.

    Here’s a cool website to help you find NAICS codes: http://www.naics.com/search/

13. Hello,
    My wife is an independent contractor as a hairdresser and just started in 2013..she reported a 16000 loss year one and a 5000 loss year two and is terribly worried about and audit..we also looked back over the taxes and noticed that turbotax automatically filled in the box about a business code with code 999999 is this going to be a red flag?

14. Hi Christine,
    I think the answer to your question is really in this blog post: http://robergtaxsolutions.com/2013/12/getting-a-1099misc-when-you%E2%80%99re-not-self-employed/

    Your daughter’s accountant advised her to issue the 1099MISC because if she doesn’t, she can’t claim the expense of paying you to edit for her. Now, if this were a one shot deal, I’d say you had a good shot at getting out of the self employment tax. But if this is going to happen again–then you really need to pay the self employment tax.

    Your daughter can’t put the income in box 3 instead–that would be incorrect (okay fraud) and I’m sure that neither of you would want to do that.

15. It is very interesting about the topic of hobby vs. business. I am a retired school teacher and file jointly with my husband. Our income is mostly from pension and Social Security. We make a very comfortable living. I recently started helping out my daughter who is trying to become an author. My job consist of proofreading her work. She did pay me $5000 to do so even though I offered to do it for a free. She was then advised by her accountant to issue me a 1099 MISC. The amount was put in Box 7. If I report it on Schedule C then it is telling the IRS that I am a business. I feel that I am not business. I do not intend to advertise or “grow my business”. I don’t even care if I get paid for this. I am doing it to help my daughter out and because as a retired school teacher, I love the work. I certainly have no intentions of making a profit. I also don’t need the money to live on since I already make a comfortable living already without it. Do I have to report this on a Schedule C just because it is reported in box 7? Can my daughter report the 1099 and put the amount in Box 3 instead? Any insight?

16. Hi Leslie,
    you can change to a hobby if you want. The IRS would probably be fine with that. But, you won’t have a $1000 net profit, you’ll have total income. Your expenses won’t be written off except on Schedule A and only after they exceed 2% of your adjusted gross income.

    Now, as far as simplifying goes, go ahead. You can have people just pay you. You don’t need to use quickbooks. You can do that even if you still do a schedule C.

    But if you’re really down to being a hobby–then have it be a hobby. Just remember, you report all the income, not the net.

17. Hi Karen,
    This appears to be an old post, but I’d thought I’d ask my question after reading about businesses vs. hobbies. I’ve had a sole proprietorship (photography business) for about four years now and want to downgrade it to a hobby. I profit maybe $1000/year with my work, but am seeing less and less business. I use QuickBooks and have filed Schedule Cs at tax time. So, my question is this: Is there an income limit to filing as a hobby? In other words, if I don’t want to close the business all together, but continue to take small jobs and money directly as a sole proprietor, can I downgrade to a hobby legitimately? Ideally I want clients to pay me directly, I’d like to close my photography checking account, and I’d like to stop using QuickBooks if I can. I’d still keep records of income, but in a more simple way. Less admin/paperwork would be the goal. Can you offer any help? Thanks!

18. Hi Stephanie,
    Since Partylite issued you a 1099 I would still file a Schedule C instead of claiming the income as a hobby. I’m concerned that there were no numbers in the boxes. Could it be that you were issued a “substitued 1099” instead of a regular one? That means that it would list the figures that you need, just not in exactly the same format as in a regular 1099.

    Or, it could be that you made less than $600 with Partylite–in which case a 1099 wouldn’t be necessary and that’s why you just got an information statement.

    If you made over $600 in revenues, you should probably file as a business, that’s what’s expected if you receive a 1099misc. If you didn’t make that much, you might want to consider just filing it as a hobby.

19. I am also on the fence of hobby vs business. I started selling Partylite last year to make extra money on top of my regular jobs. They issued me a 1099 misc with details at the top but no numbers in any of the boxes. Should I be filing as a business or a hobby? I have a website, business cards, and a facebook page to advertise as well. My jobs did change a couple months before year end and I wasnt able to devote as much time to it.

20. Hi Sharon,
    To me is sounds like you have a hobby–that’s how you think of it and that’s probably how the IRS will treat it as well. You would report the income on line 21 of your 1040 income tax return.

    Now, if you did a website for a business and they issue you a 1099MISC–then you’ll really need to report it on a Schedule C and there will be self employment tax with it. You shouldn’t receive any 1099s from individual enthusiasts though, only from business owners, so you might not have to worry about that.

    I recommend keeping track of your expenses related to building the websites though (probably not many–but your software, internet service, and things like that.) If you have to prepare a schedule C–you’ve got expenses to write off against the income.

    If you don’t have to do a schedule C–you might be able to write of your expenses on your schedule A–for itemized deductions. It’s pretty limited, and your expenses have to be more than 2% of your adjusted gross income, but it still might help. (Put your hobby expenses on line 23.)

    Here’s you next natural question: Can I claim these to be hobby expenses if I get a 1099MISC for them? You can try–you will get an IRS letter, but I think you’ve got a good argument to fight with. That said, you will get an IRS letter and you’ll have to fight so the question is–how much fight do you have in you?

    What I know is that technically you’re supposed to be able to claim the expense as a hobby–and I think you’ve got a good case. What I don’t know is a way to claim 1099MISC income as hobby income without getting an IRS letter. So far, I’ve only seen this work as a two step process.

21. I am a retired educator who does websites at a very low cost for dog enthusiasts. This year, I have made about $3500. I do not consider this a business – it is not necessary for my life and I only spend some free time playing with the sites.
    How should this be handled?

22. Hi Lisa,
    Since you’re more of a model than a sales person, I would categorize you under “independent artists, writers and performers” That code is 711510.

    You might be able to use the code for “other direct selling establishment” which covers a wide range of sales type positions, that’s 454390. But personally I prefer the 711510.

    When you have an unusual job that doesn’t fit any category, you can always use 999999. I prefer not to use the 999999 if I can find something that fits. For you, I think the 711510 is your best bet.

23. Hello Ms. Roberg,

    Just want to say thank you for taking the time to help people like me figure out these tax questions so I can report my stuff correctly! I have my full time job and two part time jobs. One of my part time jobs is as a promotional model for Beer and Liquor through a Promotional company. It consists of gigs that range from 1 – 2 hours in which we talk up the brand and reward our consumers. We are considered self employed, but I am unsure what to categorize this as for the business activity code. I do not see anything that says Promotions or Modeling or anything in that field. I just want to be able to submit my return accurately. Any help on this would be great.

    Thanks so much,

    Lisa

24. Hi Jack,
    Normally, I’d count your dj job as a hobby. But once you get a 1099MISC, well the IRS calls that a business. So, you’ll want to do a schedule C.

    So, I think you need to write off your expenses. But–if you do a section 179 write off (that’s where you write off the whole thing) then you’d have to “recapture” that means pay back–the excess write off because you’re quitting that business. So don’t do that.

    I recommend that you depreciate the equipment–regular depreciation. That should get your income below the $400 level and that would get you out of paying self employment tax.

    But–what other expenses do you have? I mean, the equipment might be $500, but could some of those things be cds, or smaller stuff? Because anything under $100 can be expensed and you don’t have to worry about “recapturing” that.

    Are you sure you want to give up being a dj? You might want to do a show again sometime. Now that you’ve got the equipment–might be some nice extra cash once in awhile. And–if you don’t dump the business–then taking the 179 deduction wouldn’t be a problem. Might be a good thing. Just sayin’–you do what’s right for you.

    So you’ll need a schedule C. Sorry.

25. Good Evening Ms. Roberg!

    I am very excited to see that someone is keeping up-to-date with their articles, even one written two years ago! I’m hoping you might be able to point me in the right direction, I’m all taxed-out this season.

    I’m a college student and I’ve been supporting myself with multiple jobs for the last few years of college, no parental assistance (graduating in May by the way, very excited!). The last few years I’ve remained a dependent under my father for health insurance reasons. With that he’s claimed the tuition tax credits for the last few years (including this year despite my being 24. Because of a layoff hes suffering from this year I’m not arguing about it, but it is a substantial loss to me).

    Anyway, I DJ’d my sister’s high school dance this year. I thought they were going to write it off as a petty-cash expense, but instead they reported it on a 1099-misc form under box 7 in the amount of $650. I wasn’t really concerned with making a profit so long as I broke even, I just wanted to do something for my sister (she was class president, other DJs were significantly more expensive). I purchased $500 worth of equipment for the event.

    With all that being said, filing as dependent, $650 earned from a 1-time event (it went poorly so I’m not doing it again), and $500 worth of equipment purchased. Where I’m confused is I’m not sure whether to fill out a schedule C (being that I am not a business), whether or not I can claim the equipment as itemized deductions in addition to a personal standard deduction, or I had read somewhere that the only income need be reported is anything in excess of $600, and that is reported on line 21 of the 1040 (so…I’d report $50? that seems very unIRS-like).

    Any advice would be extremely helpful. I’m already a little over $100 in the hole with the state because one of my jobs didn’t withhold enough, then this curveball. I start my career-job on Monday and I’m hoping to have this knocked-out by then.

    Thank you so much for your time and I look forward to hearing from you!

    Jack

26. Hi Sandra,
    If your deductions are legitimate then don’t worry about it. And it sounds to me like your deductions are legitimate. Your home office is your administrative office, you need that. That’s legit. Since you travel–your mileage is legit.
    Keep good records and you’ll survive any audit. Don’t look for a “magic audit number.” Just report what’s right. If you get audited, smile because you know you’re right.

27. Hi Tom,
    That’s a really good question. I’ve got a few thoughts.

    First, if you report the income as hobby income on line 21, the expenses don’t go on the 1040, they go on Schedule A. If you’re not itemizing already, you’ve got a little problem. You said that you sold about $15,000 worth of records. So, on the schedule A, you’d put it on line 23 and write “hobby expenses”. But hobby expenses must exceed 2% of your adjusted gross income.

    You’re a stay at home computer programer, so let me just guess your income is $100,000, and add the extra $21,000 from your hobby. That puts the income at $121,000. Two percent of that is $2420. So now your deduction is only $12580.

    If you don’t already itemize, the value of your deduction could be even less.

    Now, as a collector of old albums–you could qualify as a collector and claim the income on your schedule D. See this post: http://robergtaxsolutions.com/2011/03/hobby-vs-business-what-about-the-collector/

    The catch there is that collectibles are taxed at the 28% tax rate. But, you’d get the full value of your deduction so that might work for you. It sort of depends on what your current tax rate is. If you’re in the 33% bracket–whoa–you win. But if you’re in the 15% bracket–you lose.

    Now, if you claim it as a business, you get the full value of the write off, but the excess income is taxed at the self employment tax rate.

    Personally, I’d run your taxes all three ways and take whichever path works out to be the lowest tax for you. I can argue for your case in either direction.

28. i am a retired teacher with a small monthly income from that — i work part time as a contractor for the state making 30-35,000 a year — i made my business a llc and consider it a business— my question is i use my home as my office because i see all my clients in their home but prepare lessons, progress notes and do billing in my home office- i deduct all the normal home and car expenses– at what point should i be concerned with to many deductions is there a percentage of loss to profit– what if my expenses come to 15,000.00 ??? is that a red flag?? thanks, s

29. Hi, I earn a good salary as a work-from-home computer programmer and I have a lot of taxes taken out of my pay so I always get a big return. I put in about 50 hours a week and it pays the bills and allows me to even have a rather expensive hobby: I collect old records, especially obscure and high-end ones.
    I used to buy a lot of records on eBay, and I had amassed a large collection by the around 2005. But a few years ago I turned over a new leaf and quit buying on eBay and tried a completely different approach. I didn’t advertise or have a business card, but through networking and dumb luck, I happened to connect with numerous individuals who were interested in selling their entire large collections to me, plus smaller collections and pieces here and there from other folks I crossed paths with. 2012 was a banner year: I ended up spending about $20,000 of my pay and savings on my hobby.
    It sounds excessive, but since starting the new approach, I have always sold records online, to replenish funds and get some records out the door. You see, some of the records I took a chance on turned out to be stinkers to me but treasure to other collectors. Other records I sold were duplicate copies of ones I already had. Such is the result of buying other peoples’ collections. In 2012 I sold about $15,000 worth of records.
    The only sort of bookkeeping I did was if I spent $40 or more with an individual, then I noted the amount and the date in a spreadsheet. I also noted online sales to see how well I was able to recoup costs for each of these deals.
    This must sound like it requires a lot of hours, but having bought on eBay for so long, I already owned a lot of high-end pieces, and I already knew the record market well enough to know which records command high prices. Referrals came my way from individuals I had previously bought from. So I only put in about 10 hours a week in 2012 to networking, buying, selling, shipping, and note-taking.
    In any case, the records I sold were all shipped elsewhere via USPS, and the buyers paid about $6,000 total in shipping costs, on top of the $15,000 in sale prices. Therefore about $21,000 came into my Paypal account in 2012.
    Because the figure exceeded $20,000, Paypal filed a 1099-K with the IRS for the $21,000. I must report this on line 21, right?
    My question is, since this truly is a hobby and did not pay the bills for me, aren’t I allowed to claim $21,000 as an expense between lines23 and 35, since I spent more than that amount on the records in 2012? If so, then which line do hobby expenses go on? And will the IRS agree that this is a hobby and not a business, or am I in for trouble?

30. Gee Tim,
    You don’t take any income but you’ve put $60,000 into new equipment? I gotta side with your accountant. The big issue for “being a business” and not a hobby is that you’re in it to make money. Sorry.

31. Hello, I am a steelworker, making substantial income a year. However, I am very high energy and since only eight of the hours of my 24 are required at my real job, I spend about 20 hours a week doing other work, light excavation, composting, driveway restoration… and the list goes on.

    I ran into a scare in 2010, I have asbestosis and was threatened to be set at to pasture with a full disability from my employer and fought it off for reasons of being a work-a-holic and wanting to retire in less than 15 years.

    I started the trucking business as a “just in case” they bring it up again, and I don’t win the next time. I wanted a turnkey business I could step into…I have continued to work it, developed it and continue to expand it from those days forward, just in case. I have representation in the yellow pages, I have business cards, I have a developed property, I have a domain and I make money.

    However, I don’t make nearly enough to satisfy my accountant, and she wants me to consider a hobby status… I’ve lost money for the last 7 years… who hasn’t? I spend $20k to $30K a year upgrading equipment and only make maybe $10K.

    I have 20 months to go until I can retire, might work a few extra years past that, until my young daughter gets a bit older. Then it will be a full time thing… but she, my accountant is concerned that I am throwing to much personal funds into the business supporting it year after year.

    I call it developing it… not supporting it. Is there a difference?

    I call it shoring up for the day I become full time at it… It would be tuff to start a business like mine all in the same year, equipment wise.

    What would you suggest… I don’t need the income, but desperately need the “something to do” I don’t have enough hours in a day to actually make a significant wage from the business… so I take no income from the business, just keep buying additional tools and equipment. Big purchases… new implement building, $25000, new loader, $20,000 new development at $15,000 and I’ve paid off a new dump truck, and countless $ of other equipment.

    Any ideas?

32. Okay Sarah,
    Rule number one–if you’re on the Roberg Tax Solutions website–the one that offers the 1040.com tax program you’re not supposed to ask how to put something on Turbo Tax. You call the Turbo Tax people. 🙂
    Now, if you were on 1040.com, I’d tell you that you can only write off hobby expenses up to the amount of your income. And that would go on line 23 of your schedule A. So you can only write off $500 on line 23–and it might be that you don’t get any benefit out of it.
    Now one thing about MaryKay is that they issue a 1099MISC form–if you received on, then you’ll want to put it on the schedule C anyway–because 1099MISC really does go on a C. They don’t have to issue one if you made less than $600 though.
    If you’re doing the C–you can write off $500 of your inventory and the $200 start up costs. You can’t write off the whole inventory because it’s “inventory”.

33. Thank you for all your great advice!

    I tried starting a Mary Kay Business. I bought $1200 of product at the beginning, I bought business cards and paid for a website. I still have most of my cards and think 1 person used my website, and lots of inventory 🙂 I know this is a hobby cause I mainly like the discounts I get for the products and all I have to do is go to my box and get the products I need.

    Overall I bought about $2000 worth of product and sold $500 and spent about $200+ getting started. Where do I fill this information out. Can I do this on Turbo tax?

    Thank you again!!

34. Hi Julie,
    That’s an excellent question. Horses are always a big issue (bad pun, sorry.) I would not count your horse as a business, I’d stick with hobby–here’s why. 1. Horses are always questionable to the IRS. A breeder is given some leeway for the “years without a profit” rule, but buying, training, showing and then selling is more in the hobby category. (The IRS has this thing about not enjoying your work–I disagree but it is an issue with them.)
    But here’s something that I think might be helpful to you–you did invest a lot of money and work into the horse and you did sell it at a profit. So let’s say you bought your horse for $100 (I’m not so good with numbers, it’s been a long day.) And you sell your horse for $1000. So you’d have to report a $900 profit on your tax return. But, I’m counting your horse as an investment–you paid for training, vet bills, stuff to build his value. (I’m thinking that his value went up because he won some shows.) So that by the time you count all of his expenses–it will greatly reduce the profit you made on him so that the tax will be minimal. I think that’s the track I would take with that.

35. Hello,
    I am a bit confused between hobby and business. I bought a young horse. When it was old enough, broke it to ride, trained it for show and sold it for a lot more than I bought it. I did incur many expenses along the way in regards to said horse. Do I report this as hobby or business income. I have gotten answers in favor of both. I have a regular full time job, but devote about 2-3 hours a day working with the horses. I spend many weekends showing my horses all over the country and train with top trainers. I am quite successful. I have purchased another young horse to do the same thing with, but don’t expect to sell it for 3-4 years. I do keep all my receipts for my expenses, but do not have a separate checkbook. I don’t think it would be possible to show a profit in 3 of 5 years. So,,,,what am I, business or hobby. Thank you for any insight. PS – I have not received the 1099MISC form that you spoke of.

36. Hi Laurel,
    Congratulations to your husband on selling a piece of artwork! (My husband is an artist too but hasn’t sold anything yet.)
    This is a tough call. What does your husband want it to be? I think you can go either way. If he plans to continue selling–go for it. (The home office deduction won’t count if you zero out your income, but claim it anyway as a deduction against future income.
    For a painting to sell for $1000, that wasn’t a “mercy” buy. Somebody thought he was pretty good.

37. My husband is a full time teacher, but also an artist. He made $1000 this year selling a piece of art work. His objective is to continue making and selling art work, but there is no way of knowing right now how profitable it will be. Obviously there are A LOT of expenses involved in making and selling art. Materials, entrance fees etc. When I calculate expenses (including the “home office” or studio) they far exceed any profit. Would it be better to claim this as a hobby or Self employment? (we didn’t receive any 1099-MISC)

    Also…if it is self employment, will I have to do anything to officially establish this as a business? Would there be quarterly taxes? Etc. I’m so clueless about ALL of this!!
    (does income really need to be reported to the IRS if you actually spent MORE to make it?!)

38. Hi Anne,
    You don’t have to close the business. You can just keep the EIN number in case it starts growing again. You’ll report your hobby income on line 21 of the form 1040. You’ll put the expenses on line 23 of Schedule A. It probably won’t give you much of a deduction if you get anything at all, but that’s where you’d report it.

39. Hi there- My husband and i create and sell art. We started doing this as under a DBA with a separate ID number, fully intending to have a profitable- even if marginally- business. However, we have not been successful in that due to the current economy, even though we have indeed marketed, done our best to create business, etc. I believe the IRS will say we are a hobby because we have had losses each year…..is is better to downgrade to a hobby, or close the business? if we downgrade, how do we document that for tax returns?

40. I will look into the LLC. Thanks for the advise. I love reading your blogs. Very helpful! 🙂

41. Hi Jesica,
    Since you’re talkiing about investing $50 – $75,000 to get your space ready, that’s considered a “leasehold improvement”. You would depreciate that under the MACRS system (accounting term which tells you how much to deduct every year). I’d definitely would go ahead and start this year because this is a legitimate expense and even though you would have no income for 2011–you’re depreciating it as a leasehold improvement instead of a start up cost so you get the deduction this year (and next year and so on.) Your deduction would offset income that you earned at another job this year. (Or if you’re married, offset a spouse’s income.)
    Yes–you can do this as self employment taxes. When you’re depreciating things, there are more forms to fill out, but they still all tie to your self employment.
    One piece of advice–I work with a lot of photographers, some are Schedule C filiers, others do sub chapter S corporations–but one thing they all do is set up their photography businesses as Limited Liability Companies. So that’s something to think about. (Here in Missouri, it’s easy to do yourself on line. Other states, different rules.) That’s definitely something you should consider doing. Good luck with the new business.

42. Hi Jan,

    I’m starting a photography business. I’m actually going to rent an office space to set up a studio. I’m hoping to do it before the end of the year. However, the location I want would need interior construction done. I plan to file my business license as a sole proprietor. I do plan on having a different bank account for business use. Since I have every intention to do this as my full time job I want to file taxes as a business. Can I do that as self employment taxes?

    Also, with it being November and needing to have construction done on the building, I’m concerned about when I should start, now or in 2012? My concerns are that I’m putting $50,000 – $75,000 into start up costs. If I do that now, can I claim it on self-employment expenses even tho I won’t make any money until 2012? I don’t want to loose the start up cost deductions just because I didn’t wait a month and a half before placing orders.

    Thanks a bunch!

43. Hi Carolynn,
    That’s a good question-can you purchase materials wholesale when you’re a hobby? Technically, no. As a business, you should be able to purchase your materials to resell without paying sales tax, when you’re no longer a business, you won’t have that advantage.
    But–for my business, I don’t resell things. I have to pay sales tax on all my purchases anyway (mostly printer ink and paper). And this is what makes me think you may still have a discount going: my local office supply store lets me buy my personal stuff with my same business discount even though I’m not buying for my business. So, if you have an established vendor relationship, you pay still be able to get the wholesale pricing even if you don’t have your business, especially if you’re buying large quantities.

44. I started a business a few years ago. However, due to a family illness, I discontinued the business for 2010 and 2011.

    My question is: Do I have to be a business to purchase materials wholesale, or can I be designated a hobby and have the same benefit?

45. This is a case where you probably should have a professional take a look at it. My gut reaction (and mind you I haven’t seen your returns so I’m guessing here) is that you’ve taken Section 179 deductions to completely write off your equipment. If that’s the case, you probably will get stuck paying taxes on the “recovery”. That could be a big problem for you. On the other hand, if you were depreciating the equipment on a more regular schedule, then you might be okay.

    The other question that I would have for you is, “Why is your accounting so difficult?” The answer might be that you really do have a complicated business with complicated accounting. But, maybe the answer for you is to simplify your accounting method, keep your business, and keep your deductions.

46. Here’s another question….

    I have a craft business that I have taken large losses on in the first few years for tooling. Even though I had hoped it would be profitable…and still might be a business that I’ll come back to later, I don’t have much time to work on it lately. I’m considering switching it to hobby status, since my other contractor work keeps me too busy to spend much time doing crafts. My main reason to switch to Hobby status is to simplify and avoid doing all the yearly inventory and expense sheets for a business that is only moving a few items per year.

    What are the implications of doing this? Will I end up owing the IRS for the large losses I took for buying tools, prototypes…etc? WIll switching to Hobby status allow me to avoid keeping track of all the inventory, receipts…etc?

    Sometime in the future, I might want to go back to this as a real business. But, right now, it causes me more paperwork than profit.

47. Just an update for hobbyists. I have another page about collectors. If that applies to you, here’s the link: http://robergtaxsolutions.com/2011/03/hobby-vs-business-what-about-the-collector/

48. Thanks so much for your thoughts, Jan! I really appreciate your insights and the details you point out.

    Interesting that if I were a business, you would be able to have me showing a loss! I didn’t think of that.

    To tell you the truth, even if I’m paying a little more tax with “hobby” income, I actually prefer that to having to keep records and receipts of all the deductibles that I’d have to do as a business. (What a pain!) Fewer forms to fill out, too. I’m willing to pay a little extra in taxes just to keep my life simple.

    OK, now I know some things to watch for to see if I should start reporting the income as a business. Thank you!

49. Hi Laney,
    You ask a really good question. How do you know when you’ve crossed the line over into “business” versus “hobby”. I’m going to go out on a limb right now and say that you really are a “hobby” right now and not a business. You don’t have business cards, you don’t have a website, you don’t advertise, and you let people pay you what they think the job is worth to them. Sounds to me like you’re doing this more for fun than for real income.

    Secondly, although you say you don’t have many expenses to offset your hobby income, if I were doing your tax return showing it as a business, I’m guessing that I would have your business show a loss for every year you’ve been operating, then the IRS would insist that you be treated as a hobby. By listing yourself as a hobby, the IRS will probably get more money from you than they would by you listing yourself as a business so I think they’ll be fine with that.

    You may reach a point though where you really do have a business and you will need to start treating it that way on your tax return, but my guess is not right now. Some things that will help you make the determination that your hobby has crossed over into a business are: 1. If anybody issues you a 1099MISC with income listed in box 7 “non-employee compensation” – that’s going to force your hand and require you to file a schedule C. 2. If the amount of time you spend on this hobby is more like a regular job than a hobby. If you’re spending 20 hours a week on something, that’s equivalent to a part-time job. You’re moving into “business” mode. 3. Profit, even if you don’t receive any 1099 MISC forms, if your profits keep growing, you will need to declare yourself as a business and pay the self employment tax.

    How to tell if an activity is a hobby or a business is kind of tricky. It’s sort of like US Supreme Court Justice Potter Stewart’s famous line about pornography, “I know it when I see it.” Right now, I see your activity as a hobby. Hope this helps.

50. Useful article — thanks!

    I have a question about business vs hobby classification. Most articles assume that you WANT to classify as a business (in order to be eligible for more deductions). In my case, I’d prefer to be classified as a hobby (because my expenses are negligible and I’d rather not pay the self-employment tax if I can legally avoid it). Any guidelines here?

    Basically I do one-of jobs for people here and there, nothing regular, just whatever comes my way. Sometimes I charge; sometimes I just let them pay me what it’s worth to them. Each job is different. I don’t advertise; I don’t even have business cards or a website.

    It started small but now they are starting to add up to over a thousand dollars of income in a year. Definitely not enough to live on, but at what point does “hobby” income turn into a business in the eyes of the IRS?

    I don’t want to cut corners or “get away with” anything; I want to be legal. I report all my income. But of course I’d also like to minimize the tax I have to pay.

    Thanks!

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