Hobby or Business

Okay, so lets say you have a hobby where you can actually make a few bucks. Selling stuff on ebay or something you are making on the web (or even at craft shows). Legally, you have to claim all income you make from your hobby. Granted, the government doesn't worry if your only making a few dollars, but if you really start to make an income, you have to claim it or get in trouble. So whats the point?

Lets say you have a hobby and you end up making $15k in a year. But it costs you $10K worth of materials and time. If this is just a hobby, you legally have to claim $15k in income, even though you really only made 5K. At 15% tax rate, that means you should be paying $2250 in taxes... So after expenses and taxes, you end up with 2750.

So now lets convert the hobby into a business. Now you can claim all the materials as business expenses. So now you only have to claim 5K, which means you only pay 112.50 in taxes, so you actually make 4887.50. Makes a HUGE difference.

Okay, so obviously for tax purposes, creating a business is a lot better (even taking into account the expense to create the business and paying an accountant and dealing with state sales tax if your selling something).

But lets say you are just starting off. The first few years, you may spend 10K in materials, but since no one knows who you are, you may only sell 8K worth of stuff. This is even better for tax purposes, because you actually have a $2k loss. But after a few years, the govt. will say it is a hobby and not a business.

So if you want to start a business out of your hobby, make sure you know whats going on. If you wait to long, you may waste a lot of money, but if you start to early, you may lose the business.