Last Updated on 5 months by Heyward CPA
You started gardening to de-stress, and now your family room is filled with exotic orchids. What began as a hobby has evolved into a side hustle—you’re selling propagated orchids to other enthusiasts. With income flowing in, you wonder if it’s time to treat your orchid-growing passion as a business.
Once hobbies generate income, they often catch the attention of the IRS. To ensure you comply with tax regulations, it’s crucial to understand the distinction between hobbies and businesses.
Deducting Expenses: Hobby vs. Business
Hobby Expenses
If you earn income from your hobby, you can deduct hobby-related expenses, but only up to the income your hobby generates. These expenses fall into the “miscellaneous deductions” category, which means:
- You must itemize deductions.
- Only expenses exceeding 2% of your adjusted gross income (AGI) are deductible.
Business Expenses
If your hobby qualifies as a business, the rules are more favorable. Business-related expenses are generally deductible, even if they exceed your business income. However, some limitations may apply.
Tip: Properly categorizing your orchid-growing venture could lead to significant tax benefits. Learn more about tax planning for small businesses.
Hobby or Business? Passing the IRS Test
The IRS uses specific criteria to determine if your activity is a hobby or a business. The primary factor is whether you pursue the activity with the intent to make a profit. The IRS assumes profit motive if:
- You’ve earned a profit in 3 of the last 5 years, or
- 2 of the previous 7 years for horse-related ventures.
If you don’t meet this threshold, the IRS may ask additional questions:
- Do you keep accurate records and separate business finances from personal finances?
- Do you invest significant time and effort in the activity?
- Does the activity involve personal pleasure or recreation?
Maintaining detailed records and treating your hobby like a business can help you meet these criteria. Explore our small business accounting services to simplify recordkeeping.
Why You Should Seek Professional Help
Navigating the nuances of hobby vs. business taxes can be tricky. Misclassifications may result in penalties or missed deductions. An experienced accountant can help you:
- Determine whether your hobby qualifies as a business.
- Maximize deductions while ensuring compliance with tax laws.
- Set up proper financial records and systems.
Conclusion: Turn Your Passion into Profit with Confidence
Whether selling orchids, crafting jewelry or pursuing another passion, knowing how to handle hobby income is essential. Treating your venture like a business can unlock valuable tax benefits and set yourself up for growth.
Ready to take the next step? Schedule a free consultation with Heyward CPA, and let us help you turn your hobby into a thriving business!