As an entrepreneur at heart, I can easily relate to the struggle of not knowing when to take the leap and turn my hobby into starting a small business. You enjoy what you do and are happy that others appreciate the service or product, but is it really lucrative enough for you to depend on financially? If you are contemplating starting a small business, we have some insight on how to know when to transition your hobby into a business.
How To Know When To Transition Your Hobby Into a Business
Should I keep doing this just for me or begin thinking about how to start a small business?
I’m sure you’ve asked yourself this question several times. There are several factors that can help you determine if it is time to take your hobby to the next level.
- Do you handle your service/product in a businesslike way?
- Is your intent to make a profit each time you receive a request?
- Does your livelihood depend on the income you receive from your hobby or side hustle?
- Are any financial losses due to circumstances beyond your control?
- Have you ever changed your method of operation to increase profits?
- Do you or a business advisor have the proper knowledge for starting a business?
- Have you been successful in making a profit for an extended period of time?
- Can you foresee the product making a profit in years to come, and if so how much?
Based on your responses to these questions, you should be able to determine whether or not it is feasible (or advisable) to transition into business for yourself.
Tip: Don’t quit your day job too fast! Keep a safety net of steady income and get your startup business on track before fully going into business for yourself.
Tax Deductions For Hobbies
We spend a lot of time discussing the array of business tax deductions that can be taken during tax season but tend to not shed much light on allowable hobby deductions. Well, that’s about to change! Here’s some brief insight on what tax deductions can be taken for your hobby.
Typically, you can deduct standard expenses that are necessary to perform your hobby. The IRS considers an ordinary expense to be one that is common and accepted for the activity. A necessary expense is one that is appropriate for the activity.
Hobby expenses can only be deducted up to the amount of the income you receive for your hobby. If expenses for your hobby exceed its income, then you are considered to have had a loss. Losses can NOT be deducted from other income.
To deduct expenses for your hobby, you must itemize each deduction when you file your annual tax return. Each expense will fall into three types of deductions. For more information on hobby expenses and their deductions, click here.
Make Your Transition Smooth
If you are considering turning your hobby or side hustle into a small business, or have already done so, make sure you have a trusted payroll provider in place as you build your dream team. PayWow provides single-digit employers with an all-in-one payroll and compliance solution. Using PayWow means you will spend less time crunching numbers, which allows you to focus on what’s really important–your business! Sign up for your free trial today and start taking control of your small business payroll!