If you’re a mom limited to the daily routines of your wee ones, taking up a hobby can be a good method for self-expression. The hobby could be anything from blogging to baking to knitting. Frequently, hobbies end up being lucrative enough generate a supplemental income, and in some extreme cases, produce enough income to support the family altogether.
When a hobby begins to grow beyond the boundaries of personal fulfillment and into the realm of producing a real income, chances are, you have a real, small business on your hands. It is one thing to sell a few loaves of banana bread at the local PTA auction. It’s quite another when the organization orders 10 dozen loaves at a price that puts a sizeable amount of cash into the baking mom’s pockets.
The IRS defines a hobby as an endeavor or activity that is not pursued with the intent of making a profit. It is important to report and pay taxes on virtually all streams of income, including hobbies. It is also important to know at what point a hobby turns into a business. But how does one tell?
Review Your Income Taxes for the Last Five Tax Years
Profitability is a sure sign that a hobby has exceeded its limits as a pastime and has headed into the small business arena. Take a look at your tax returns over the last five years to determine how much, if any, profit was made. If the returns show a profit for at least 3 of the last 5 years, the mommy hobby argument is no longer valid. The IRS will consider you to have a profit motive in operating this business.
Apply for a Small Business Credit Card
Once you obtain a small business credit card you can easily take the steps necessary to turn your hobby into a true, money-earning endeavor. This might entail using the card to purchase newspaper ads or business cards for greater exposure or investing in a larger space to accommodate the growth of your business. The American Express Small Business Credit Card can be used as a valuable tool for capitol because you can earn reward points from business purchases.
Check Local Business Rules and Stick to Them
When you sell your goods, all sales are subject to state sales taxes unless you live in a state such as Oregon that does not have a state sales tax. A seller’s permit may also be required. A lot of U.S. cities require every business, including hobby businesses, obtain a tax registration certificate. This is true even in the event that you do not intend to claim any state or federal tax deductions for your hobby business.
If you are operating in a state that levies gross receipts, charges a sales tax, or levies excise tax on businesses you may have to apply for a tax permit or otherwise register with your state revenue agency.
Take Out a License
Getting the necessary licenses will demonstrate to the IRS that you have decided to take your hobby to the next level and turn it into a business. It will also help you save money in the long run, because you will then be entitled to certain tax deductions for your business. These include all startup and operating expenses, health insurance and your inventory. Investing in a good business guide can be helpful when determining what can and cannot be deducted. All information about taxes, permits, licensure and other items pertaining to the legalities of transforming a hobby into a bonafide business may be found through the U.S. Small Business Administration (SBA) website at www.sba.gov.
About the Author: Lauren Rose is a stay at home mother of three that would like to go back to school to get her MBA from the University of Minnesota’s Carlson school of Business. Her youngest is 7 so that will keep her at home until she is off to college.
