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    4 Replies Latest reply on Jun 3, 2008 7:12 PM by Bridge

    When does a hobby turn into a taxable small business?

    Mozart Wayfarer
      I'm retired now and have been teaching piano lessons to a few neighborhood kids. It's fun for me and it's also nice to have some extra cash. Word is spreading quickly about my music lessons and I am starting to get more students. So, I was wondering when does a hobby turn into a taxable business?
        • Re: When does a hobby turn into a taxable small business?
          davep2 Newbie
          Technically there is no difference betweena hobby and a business. Whenever you take in money, you should pay tax on it. The advantage of declaring yourself a business is that you can file a Schedule C with your 1040 and deduct business expenses.
          • Re: When does a hobby turn into a taxable small business?
            gmonkey Wayfarer
            Funny you should mention this, as I am in the same boat. I create wall hangings for friends and family, and while I think the technical answer given previously is correct, it feel a little funny paying taxes on something you made (albeit paid) for a friend.

             

            I think the line in the sand for me is really where I started selling to the general public. When the customers are no longer immediate friends or family, you should probably start filing taxes.
            1 of 1 people found this helpful
              • Re: When does a hobby turn into a taxable small business?
                SCORE 31 Newbie
                If a business fails to show a profit within a three year period it is considered a hobby and you cannot claim any business expenses on your tax return. A home based business has allowable deductions such as a percentage of your mortgage, taxes, insurance, utilities, etc. plus depreciation on the value of your home. This is done as follows: you must have one or more rooms devoted specifically for your business use and you calculate the percentage of square footage they are of the entire house. Let's say for example that it's 20 percent. You then take 20% of all the above expenses to claim as a deduction in your tax return. However, "what the government giveth the government taketh away" applies here. If, in the future, you decide to stop the business. sell your house then you must pay tax on the profit you made and that tax will be the same percentage you claimed as a business expense in prior years; 20 percent in this case.
                Another thing to consider is that your business may have to be handicap accessible. Check with your County Clerk's office on that. It is required in New York and I don't know if it's a national law or local one.
              • Re: When does a hobby turn into a taxable small business?
                Bridge Navigator
                If you get paid, its taxable...