Do you make some money as a hobby? If so, you may be able to deduct the cost of the hobby from your taxes.

A hobby can deduct expenses up to the amount of money you make. So, if you make $100, you can deduct $100 worth of expenses.

If you run your hobby as a business, however, you can deduct all your expenses even if they are more than you made from the hobby.

What’s a business?

The IRS defines a business as an activity engaged in for profit. (Income minus Expenses equals Profit.) But they don’t require you to make a profit, only that you have the intention to make a profit. If you show a profit in 3 of any 5 consecutive years, the IRS assumes you are intent on making a profit.

Let’s take gardening, for example. If you grow flowers and sell them to your friends and family for $1000. You can deduct $100 of the cost of fertilizer, seeds, compost, tools, classes, transportation, etc. Setting up your gardening as a business (see checklist), allows you to deduct all expenses from your taxes.

Here’s what you need to do to show that you are intending to make a profit.

• Operate like a business by keeping accurate records.

• Act professionally by hiring or consulting with experts in your field and keeping track of how you followed their recommendations.

• Make a serious effort by devoting time to your business although it doesn’t require 40 hours. If you have employees, make sure they are qualified to be in their position.

• Make sure there is the potential to make a profit. Even if you have losses over a number of years, you can still demonstrate a profit motive if assets you have purchased are expected to appreciate.

• Past success or experience in the field can demonstrate a profit motive in the current business.

Specific things to do:

• Register your business name in either your state or county.

• Set up a separate checking account

• Create and use business cards and stationery

• List your company in the phone book

• Keep logs of business contacts

• Advertise

• Send mailings to customers and prospects

• Have a business telephone

• Pay quarterly payroll or estimated taxes if appropriate

Final words…

If you have a hobby that can make money, set it up as a business. This is a good recession move and the government will help you get started in the form of tax deductions.

Note: Please review your business set up and tax deductions with your personal tax advisor.

Warmly, Cindy

P.S. If you need help with your money, taxes or your business finances, contact Cindy.