Hobby vs. Business – What is the difference?
A business has the goal of eventually making a profit. It’s ok if it’s not making a profit in the first couple years, but after the third year, you’ll need to show a profit on your tax return to prove to the IRS it’s not a hobby.
The big downside to a hobby is that if your expenses are more than your income that year, you can’t deduct more expenses than the total income you brought in.
Sarah set up a single-owner LLC in her state after learning that this structure provides a little more legal protection than staying a sole proprietor (which is the default for any business). Then, she went to the bank to set up a separate business checking account. She took all her business paperwork and it took about 45 minutes to sign all the papers and get it set up at her bank. Now she has a place for all her payments to go in and all her business-related expenses to come out of so when it’s time to do her bookkeeping, she’s not trying to remember all her expenses!
Mike McVay, Tax Accountant - 850-725-5696 - Mike@MikeMcVay.com