Many people have dreamed of turning a pastime into a labor of love. And it can be done, but one must be aware of the taxing authorities.
You’ve had a hobby for years, but now want to turn it into a business, qualifying for tax deductions.
Can you?
The Taxing Tests
The Internal Revenue Service (IRS) has several tests.
“If someone has a business, they operate the business to make a profit,” the IRS says. “In contrast, people engage in a hobby for sport or recreation, not to make a profit.”
Yet profits aren’t the entire story of how a business becomes a business. And hobbies becoming start-ups happen in various ways.
Some Forest Hills Businesses Are Born
Forest Hills is an upper-middle class neighborhood in the county of Queens, one of the five counties of the city of New York. Here is a place where several hobbies have become businesses.
Several years ago, Ofer Kertes, an executive chef, would go downstairs from his Forest Hills apartment to his favorite Red Pipe Café. The owner was sometimes overwhelmed.
“I helped him out. It became a hobby to help,” Kertes said. “Suddenly my hobby was a business,” Kertes says. He is now part-owner of the Austin Street eatery.
Dogs to a Business for Dogs
Animal lover Gary Tambrin was a cable television employee, but turned walking dogs into a business some 12 years ago.
He dumped cable and started Dogged Pursuits (“You got the poop. I got the scoop”).
“I began walking some neighborhood dogs to make ends meet and three dogs became five became seven and so on.” Tambrin’s business has become so popular that some now call him “the mayor of Forest Hills.”
Making the Transition from Fun to Business
How can one go from a hobby to a business without an IRS headache?
“Keep records. Open up a separate credit card account that is dedicated to your business,” according to Bernard Kiely, a Morristown, New Jersey CPA.
Kiely says the general IRS rule is post a profit in three years out of five. But he adds there is another safe harbor: “Are you doing things to try to make money even if you are not making money?”
Smoking Joe Beats the Feds
There is an example of Kiely’s rule.
Alistair Nevius, editor of the Tax Adviser, cites the case of boxer Joe Frazier.
He had a money-losing farm in Brewton, South Carolina. Smoking Joe was denied business deductions. However, Frazier, said it was not “a hobby farm” and went to court. He knocked out the pesky publicans in court and restored his deductions.
“After careful scrutiny of all of the evidence, including the testimony and exhibits presented, and the various objective factors,” the Tax Court held, “it is our conclusion that petitioner (Frazier) had the requisite intent to make the Brewton farm a profitable operation.”
Have a passion for something and want to turn it into a business?
It can happen. Just do some research and then you can start to live the dream.
