Many dream of earning a living doing what they already love to do. What if you could turn that hobby from being a costly personal expense into a money-generating side hustle, or even your main business? The IRS no longer allows deductions for hobby expenses, but business expenses are eligible. Statistics suggest that one out of every five Americans will start their own business in the coming year. If you want to be one of those entrepreneurs, there are a few things to keep in mind to get it right.
Steps to Take
There are ways to monetize so much of what you spend your money and free time on, especially if you market on the internet using social media and become the expert in your field. With the rise of opportunities to sell online with Facebook markets, Etsy and other selling apps, the sky's the limit for converting your hobby into a new small business.
- Plan your goals – It may be a hobby you’re very good at, but you need to make money. Setting goals around a business plan is the first step.
- Start out part-time – Until you know you can make money, do your business on the side. Keep your full-time job until you don’t need it.
- Customers – Know who your target customers are and find your first one. Offer to do one or two jobs for free just to get started and build your business mindset.
Hobbies that Translate Easily to Business
Most people have something they like to do, but to turn your hobby into a business, you need to get educated about the demand for your product and trends in the industry. Here are a few examples of hobbies that can earn extra cash, and perhaps eventually earn you a living:
- Illustration/Design/Graphic Arts
- Digital Humor & Commentary Sites
- Cooking/Recipes/Trending Diet Ideas
- Traveling Commentary and Journals
- DIY Crafts and Projects
- Vintage Items/Collections
- Digital Music/Videos
- Fine Arts & Lessons
Start out by knowing the laws (or consulting with someone who does) for every IRS tax and deduction that applies to your new business. Making sure you stay compliant will make your life much easier. Here are some important things the IRS looks at to make sure you’re conducting a business and not just a hobby.
- Record keeping – Keep meticulous financial records. Research bookkeeping software to see what works. Open a dedicated bank account for business expenses and income. Keep personal and business expenses separate!
- Take Advantage of Tax Incentives -The 2018 tax law changes provide a new tax deduction that can be as much as 20% of the net business income; the qualified business income deduction. Also, operating your hobby as a business can allow you to convert some personal expenses to business deductions, which will also reduce your taxable income. Consult your tax accountant for details.
- Pay yourself - If it doesn’t look like you depend on the income from the business, your activity might look like a hobby.
- Expert in your field – You should either have training or experience in your new industry or hire people who do. You have to show that you’re able to deliver what you are selling. Pay your taxes – Since you’re keeping business and personal expenses separate, you’ll need to pay both types of taxes, as well. Staying compliant helps your business from waving red flags.
- Make changes as you go – It might take some time for a new business to turn a profit, and the IRS knows that this is normal. If they see you making changes to be more profitable over time, they will take your business more seriously.
Myrick CPA loves to support new and small businesses; they are the foundation of our communities. When you’re ready, let us help you get your new business off on the right foot with the kind of planning that positions you for growth and tax savings.