So you made a few signs for a friend’s wedding. They turned out amazing and some guests took notice. Now, you’re getting orders for chalkboard wedding signs into the fall of 2018. The good news? You enjoy doing it; it’s your side hustle and is proving to be lucrative. And there’s nothing wrong with that. But you do have to be aware of some tax implications that pose the question: is it just a hobby or an actual business?

The IRS explains:

Taxpayers must report income earned from hobbies on their tax return. The rules for reporting that income and expenses depends on whether the activity is a hobby or a business.

So, is it a hobby or is it a business? This might sound obvious, but one key feature of a business is that people do it to make a profit.

Take into account all facts and circumstances with respect to your activity and consider these nine factors to help you make the distinction:

  1. Do you carry on the activity in a businesslike manner?
  2. Does the time and effort you put into the activity indicate you intend to make it profitable?
  3. Do you depend on the income from your activity for your livelihood?
  4. Are your losses due to circumstances beyond your control (or are normal in the startup phase of your type of business)?
  5. Do you change your methods of operation in an attempt to improve profitability?
  6. Do you or your advisors have the knowledge needed to carry on the activity as a successful business?
  7. Were you successful in making a profit in similar activities in the past?
  8. Will the activity make a profit in some years and how much?
  9. Can you expect to make a future profit from the appreciation of the assets used in the activity?

Note that no one factor alone is decisive and you should generally consider the questions. You can read more about these distinctions here.

Once you’ve made the determination, the IRS offers up these tax explanations.

Allowable hobby deductions: Within certain limits, you can usually deduct ordinary and necessary hobby expenses. An ordinary expense is one that is common and accepted for the activity, a necessary expense is one that is appropriate for the activity.

Limits: Generally, you can only deduct hobby expenses up to the amount of hobby income. If hobby expenses are more than the income, you’d have a loss. However, a loss can’t be deducted from other income.

How to deduct hobby expenses: You must itemize deductions on your tax return to deduct expenses. Expenses may fall into three types of deductions and certain rules apply to each of the types. Learn more about them here.

To learn more, click here for the IRS article. 

Disclaimer: Please note that this is not all inclusive. Our guidance is designed only to give general information on the issues actually covered. It is not intended to be a comprehensive summary of all laws which may be applicable to your situation, treat exhaustively the subjects covered, provide legal advice, or render a legal opinion. Consult your own legal advisor regarding specific application of the information to your own plan.