So which is it – business or hobby and what do I do with it (tax wise)?
Taking photographs during my many sightseeing trips and hiking excursions, as well as annoying my friends and family with limitless flashes during birthdays, weddings and dinners, was always my passion. With time, and as I could afford a better camera, my pictures became better and better. Those previously “flash annoyed” people recognized that I am a pretty good photographer with a keen eye and intuition so they frequently asked me to immortalize their greatest moments such as weddings and other family events. Suddenly I was busy every weekend and holiday. And what is more, people paid me, and then their friends and neighbors started calling.
When I first took photos it was a hobby, a passion to help me remember all those fleeting moments and places I saw. But now I am clearly making money so is it still my hobby or did I just inadvertently start a business…. And then a thought hits my mind – “If this is a business then the IRS will come knocking sooner rather than later. Now what?”
How do you decide when a hobby is no longer just a hobby but a business? And more importantly – what do you do next?
First – do not panic. Take a deep breath. If you are not a professional accountant, there are ways you can fairly easily figure it out whether or not you might have a business, and how to report the money you earned taking all those magnificent photos. (Thank you World Wide Web!)
Below are some of the IRS guidance questions that if the answers to them are “yes”, then the chances are you do have a business.
- Does the time and effort you put into the activity indicate that you actually are set on making a profit?
- Do you in any way depend on the income from the activity to support yourself, i.e. do you depend on the money to survive?
- If you spend more on the activity than you earn from it, is it because of the circumstances beyond your control or perhaps did they occur in the start-up phase of the business?
- Do you have the knowledge needed to carry on the activity in question as a successful business?
- Is this something new or have you made a profit in similar activities in the past?
- Did you open a separate bank account to deposit the funds received from the activity?
- Do you perform activities considered typical of a business operating in that industry, such as advertising?
If you answered “yes” to most of the questions and you have reasonable expectation to earn future profits, guess what – you did start a business. Congratulations!
Now is the time to keep all the receipts and have good records, and of course to call an accountant so he or she can offer the best approach to deal with your growing income.
However, if you believe that none of this applies to you or even sounds familiar the chances are your activities are just a hobby and not a business. But do not fret if you made some money from it. You can still deduct the necessary expenses related to photography, such as camera costs, film or printing on your return. But be warned the expenses deducted cannot exceed the money you earned and they cannot be offset with any other income.
When you read this small article and you think “this is me” or if you are simply not sure, it’s time to pick up the phone to speak with one of the many great professionals at Hagen, Kurth, Perman & Co. We are the team who can assist you in finding the best solutions to match your individual needs.