With life expectancies increasing and income growth languishing, many retirees are seeking to make some extra cash from home-based businesses. A home-based business may provide extra funds needed to make a retirement more comfortable, but it can also present pitfalls.
If, for example, you have a hobby, such as photography or making crafts, and family and friends have suggested you sell the items you make, you could consider selling them online.
Especially early on, you probably won’t make much money. However, you will incur business expenses, such as computer equipment and office supplies. If you decide to deduct these expenses at tax time, you may realize a business loss. But can you then use this loss to offset most, or even all, of your other income?
It’s recommended you consult a professional on tax regulations before you set up your business. Generally, if what you’re doing is considered a hobby, you can deduct legitimate expenses only up to the amount of the income the hobby generates – not from other income.
Hobby vs. business
The Internal Revenue Service (IRS) differentiates between a hobby and a business. The IRS says there are nine factors to consider, including the time and effort you put into the activity and whether you depend on the income for your livelihood. Typically, the IRS presumes an activity is carried on for profit if it made money in at least three of the past five tax years, including the current year (although that can differ for certain activities, such as animal training and breeding).
Your best bet is to keep clear and detailed records of what you make and spend, and talk to a professional first if you’re considering deducting expenses from a home-based business.
Because, as pleasant as making money from a hobby may be, you don’t want to end up on the wrong side of tax laws.