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Is it a business or a hobby? How can you tell?

The internet has had a profound effect on the average person's ability to pursue hobbies, to buy hard-to-find products and to sell their own products. Websites like Etsy have even turned arts and crafts hobbies into successful money-making operations for some people.

If you've ever dabbled in "e-tail" or wanted to try doing so, you may eventually run into a peculiar question: Is this a hobby or a business? That question is not always easy to answer, and the considerations involved are not necessarily what you would expect them to be.

Being considered a business can be enticing because it often comes with available tax deductions. On the other hand, businesses also have to comply with laws and regulations that mere hobbyists are exempt from.

When deciding whether or not your hobby is indeed a business, the IRS would likely consider a multitude of factors taken together. Here are some questions you might want to ask yourself:

  • How much time and effort are you expending?
  • Do you pursue the activity with the intent to make a profit?
  • Are you relying on earning a profit in order to make ends meet?
  • Do you have another job that pays a steady income?
  • Are you businesslike about pursuing your activity, or do you mostly just do it when you have time?
  • Are you keeping detailed records of costs vs. profits?

It is important to note that your endeavor could begin as a hobby and eventually turn into a viable business, and vice versa. You should also know that even if you aren't running a business, any income you earn from your hobby may need to be reported on your taxes.

If you have any questions about running your own business or just making sure that your hobby doesn't get called a business, please seek the help of an experienced tax law attorney.

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