Tuesday, May 24, 2016

Could Your Hobby Become Your Small Business?

Most people spend their entire lives working for someone else, sometimes doing work they enjoy and other times just earning money to pay the bills. They dream of retirement when they will have enough money to do something they love to make a bit of money and keep busy. Some entrepreneurs have figured out ways to make their hobbies pay, either by focusing their energies and knowledge in very specific ways or by creating side businesses that do not take too much of their time but are still financially and personally rewarding.

Suppose you like coin collecting and have a real passion for it. You are familiar with which coins have very high value, what coins other collectors discuss and search for, and which lower value coins can be located easily and sold for a profit. You’ve read extensively about or even seen famous coin collections exhibited. With this sort of hobby, it’s not the coins you manage to acquire that gives you a marketable advantage - it’s your knowledge of both coins and coin collectors and your ability to bring the two together. Collecting has given you that skill set, and setting up an online storefront/ecommerce site would be a straightforward way of making that available to others. Beyond that initial investment of time and money, all you’d have to do to make your business viable would be to spend more time on your hobby.

This seems like a win-win situation, doesn’t it?

There can be complications, however. A lot of hobbyists dabble in making money, selling to friends or acquaintances or just when they need a little extra cash. They ease into business creation so slowly they don’t realize they are failing to act like business owners, whether that means detailed record keeping or declaring income to the IRS. Obviously, this can get them into trouble - the more trouble the more successful they are.

A long-standing IRS rule is that the income you make doing your hobby is considered business income if you’ve made a profit for three out of five years, including the current year. Obviously, the more money you make, the more it would benefit you to consult a tax professional and ask for advice. You do not want the IRS to dun you for thousands of dollars because you were better than you thought at your interests.

It gets more complicated when you lose income because, while the IRS counts every bit of money made as income and expects you to report it, it only allows you to deduct losses against gains. So if you make $2000 selling coins and lose $775, you are responsible for paying taxes on the net $1225 of profit. If you simply lost $775 this year on your hobby, that’s just bad luck for you.

It’s always best for a business owner to keep scrupulous records and remain apprised of any tax laws that might apply to them, but don’t let those considerations scare you away from trying to build a business with any knowledge or skills you’ve picked up because of your love for something. Chances are that if you’re in expert in something, there’s a way to benefit from that expertise somehow. A little bit of brainstorming into the how could result in money in your pocket.

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