|
|
|
 |  |
|
| 9.5 | Money Tip - Turn Your Hobby into a Business |
|
How to earn extra money and create tax savings by turning your hobby into a business.
|
 | “Hobby Loss” is a term used by accountants to describe the missed tax savings when people have a business that is deemed a hobby instead of a real business.
If you turn your hobby into a business and treat it like a business, you will get valuable tax savings. Who knows? Your business could really take off! You could be doing what you love as a career! Could you teach skiing or tennis lessons? Could you sell those paintings? Could you start a book review newsletter? Could you put together other people’s scrap books?
Our tax system is set up to encourage small businesses. If you take a hobby and really try to make money, the government wants to help you. Depending on the type of business you set up, the business expenses can be deducted from your income. You only pay taxes on the income after the deductions are taken out.
Here is an example of the savings:
Suppose you have $100,000 in income before taxes. Your tax rate is 28%. Before any other deductions you will be paying $28,000 in income tax to the federal government. If you have a hobby that you spend $5,000 on per year and you start to treat it like a business, you deduct this $5,000 from your $100,000 before taxes. So, you will only pay taxes on $95,000. The taxes you pay will be $26,600. You save $1,400!
If you are going to spend the money supporting your hobby anyway, this is a great way to save money.
Some examples of deductable business expenses are travel, your home office, office supplies, media, business related travel in your car, employee pay, interest on any money that you borrow, retirement funds, sales tax on thing you buy, insurance, and business related training (like seminars, classes, or even related books and CDs).
You do have to make sure that you run your hobby like a business. Remember that you will be required to really try and make a profit. Here are some of the rules:
1- Put regular time into the activity. The more the better!
2- Run the activity in a professional, business-like manner. Have some business cards. Have a separate bank account. Have separate books. Really try to succeed!
3- Make sure that you have the “level of expertise” necessary to earn a profit from the activity. You should start the business in an area where you have knowledge and skill.
4-Try to continually improve the business and really try to make a profit. If you just sit back and keep taking the deductions without trying to make a profit you will loose your business status.
Your next step is to find out how to set up your business! Get a book about starting a small business (remember that cost of the book is a deductable business expense!)
|
|
|
If you like this tip, read these books!: |
|
Click here to see all of our Money tips
|
Here are some other related tips:
|
|
Further Information
|
|
|
|
|
|  |
|
| Leave a Comment About the Tip: 'Turn Your Hobby into a Business' |
| |
|
|
|
|