Every month, I will highlight a common question I get from my tax and accounting clients. Since so many of my clients are authors, speakers, or other creative entrepreneurs, I’ve come across some doozies.
This month, I’m tackling one of the more common questions I get from newer authors and speakers: How do I know if I have a business? Stated differently, when should I start reporting my income as a business to the IRS.
This question is not as difficult as one might think. It seems tough because it is easy to think that a hobby is for fun, while a business is to make money. The distinction between a hobby and a business is motive or passion, but surprisingly the IRS doesn’t care about your passion or your motive. The tax man looks only for dollars and cents.
If you search for an answer to this question on Google, you will likely come across a list the IRS has put together. At last count, this list had 13 items for your consideration. THIRTEEN!
Thankfully, nobody has to actually abide by this list. It is far simpler than the IRS seems to indicate on their site.
With that in mind, the clear distinction between a hobby and a business is cashflow. To be more specific — revenue.
While a business is certainly able to lose money in its first few years of existence no business exists without profits. And, no business can exist long term and earn profits without at least one product. These products could be services, digital products, or access to intellectual property. But you need something to sell. These are the metrics that identify the difference between a hobby and a business.
If you have something to sell, and you are actually selling it, then you can say you have a business.
Otherwise, you have a hobby.
For creative individuals, a hobby and a business can look quite similar. For example, you might decide to start writing a blog because you have a message burning in your heart. Since it’s passion-based, it feels like a hobby. And it might be just that — but it could also be a business.
If, as a result of your blog, you end up earning income through sponsored posts or freelance writing opportunities, then your passion has become a business. Simply because you are earning money from it.
Here’s the bottom line: If you are making money, the IRS gets a piece of it. If you are earning a profit, it is a business. If you are not earning a profit, but you have products or services in development, then it can also be considered a business.
Like any other business, your business may also have expenses. I would expect nothing less. Common expenses for authors and speakers include travel, potential client meetings, training or conferences, website domains, website themes, and potentially a home office.
So, keep these concepts in mind as your business and opportunities grow. I look forward to sharing more tax and accounting knowledge with you in the coming months.
Chris Morris lives in Phoenix, Arizona with his wife, three teenagers, and his dog Freckles (she brings sanity to us all). In addition to being a coffee snob, he enjoys a great tabletop game like Catan with friends. He enjoys his work as an accountant with creative entrepreneurs because their passion is contagious, and every day is a new adventure with his clients.