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Ask Dave

When a Hobby Becomes a Business

Dan wants to know when a hobby officially becomes a business. What's the marker?

QUESTION: Dan on Facebook wants to know when a hobby officially becomes a business. What’s the marker?

ANSWER: The IRS says if you run a business for two years or more without making a profit, it is not a business. It’s a hobby, and you can no longer take the tax deductions for the expenses. You have to become profitable at some point or the IRS declares you a hobby. I don’t think that’s a bad marker at all.

If you’re making money at something, then it is a business. It’s creating an income. If it’s a tiny bit of money and you’re crocheting and your friend gives you $5 for a doily or whatever, that’s not what I’m talking about. At the point that you create an online store and an eBay store and you have a whole Pinterest strategy for displaying your crochet and running sales internationally, now your little hobby has become a business.

Do you intend to make money? Are you making money? I laughingly tell people all the time—you’re running this business; we’re not here to spin our wheels. A business that doesn’t make money is a hobby. Realistically, that becomes true except with a hobby, you should get some enjoyment out of it, and sometimes people run businesses they don’t get enjoyment out of for no profit. The difference is profit. That’s what it comes down to. You need to become profitable within a reasonable period of time or you need to put your efforts toward something else or just back up and say the intent here is not for profit. Translation: This is a hobby. People collect things or build things or stuff like that that are hobbies—literally stress relievers—those kinds of things, and they had no intent from day one for that to be a profit issue.