Is Your Home Business a Hobby?

Know More: Taxes for the WAHM Hobbies, home based business, home business advice, Record Keeping, tax savings

The answer just might surprise you. If you live in the United States there are very different tax consequences depending on how this question is answered.

In the eyes of the Internal Revenue Service (IRS) there is a significant difference a hobby and a business. Expenses for a business can be deducted. Expenses from a hobby cannot be deducted.

Businesses have a profit motive. Hobbyists are simply pursuing a pleasurable activity, whether or not they receive any profit from it. (Income from both businesses and hobbies must be reported.)

According to current IRS rules, if your business made a profit for three out of the last five years (or two out of the last seven years for breeding, showing, training, or racing horses) then it is generally considered a business for tax purposes.

In a nutshell, this means that if, over the course of several years, your business consistently costs more to operate that you take in, your business might be considered a hobby.

For additional information, refer to the IRS website. Always consult your own tax accountant for specific questions or issues related to taxation.

Has this issue affected you? Leave a comment and let us know.

I know that some Work From Home Momma readers live in other countries. How is this issue handled in your country? Let us know.

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Hi Brook!

I would always check with your own accountant for specific advice, but my guess is that if a new business is earning a profit and has an intent to continue earning profit then it has a good chance of being a business.

I think probably they are trying to discourage people who don't make a profit year after year, yet want to take all kinds of business expense deductions ...

Posted by: Laura | August 31, 2007 11:50 AM | Permalink to Comment

Devoted to WAHMs -Work at Home Moms

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