If you’re making money from something you love, that’s fantastic! But have you considered whether your passion is classified as a business or just a hobby by the IRS? Understanding this distinction is crucial for managing your taxes effectively and avoiding unexpected surprises.
In our latest video, we break down how to determine if your activity qualifies as a business. Here’s a brief overview of the key steps:
- Understand IRS Guidelines: This step is crucial because it affects how you report income and claim deductions. The IRS looks at whether you’re making a profit, how much time you spend on the activity, and whether you rely on the income. Knowing these rules helps you stay compliant with the IRS.
- Keep Detailed Records: This is where many people go wrong. They don’t track income and expenses properly. Document everything—keep receipts, track your hours, and note your efforts. Proper records are essential if you need to prove to the IRS that your activity is a business, not just a hobby.
- Evaluate Your Profit Motive: Treating your activity like a business increases the likelihood that the IRS will see it as one. Set clear goals, make plans, and concentrate on profitability. This approach ensures that your activity is classified as a business, enabling you to benefit from tax deductions and grow your income.
By following these steps, you can confidently classify your passion as a business, allowing you to take advantage of tax deductions and grow your income. For more insights, watch the full video and don’t forget to like, share, and subscribe for ongoing tips!
Joy Lutz, CPA, CTP
As the founder of Aligned CPA, Joy has built a firm that is your strategic financial partner. With a growth centric approach, we build meaningful relationships with our clients because we value their success as much as our own.
Positioning ourselves as the tax and financial strategists for your business, we help you make empowered, financial-based business decisions that lead to long term success.