Business vs Hobby – why it’s important

A lot of new business owners find themselves losing money at first, maybe even for several years. Others find that even though the business makes a little bit of profit, it sure isn’t enough to replace their day job, at let’s face it – most business owners get into business for three reasons:

1) To do what they like and are good at

2) To be the one calling the shots (a double-edged sword, but that’s another topic)

3) Unlimited upside (hopefully) – eg, they want to replace their day job income and reap the profits that can come to a savvy business owner.

Sadly, starting a business does not magically confer the knowledge of how to run one. That’s a whole different skill set that has to be learned concurrently. But, if you are serious about having a business, it has to look like a business to the IRS, or you can lose the ability to deduct those business expenses on your tax return.

Since there’s no point in re-inventing the wheel, here is a great illustration, using two clowns, of the difference posted on keepertax.com. https://www.keepertax.com/posts/business-vs-hobby