Believe it or not, the IRS actually doesn't care whether you are a business or a hobby. If you make money, you pay taxes. End of story. The only reason you need to know if you are a business or if you are a hobby is so you know how to file taxes. We will go into this "how" in greater detail later. For now, we will further explain why you should file as a business.
The IRS typically utilize the following characteristics for businesses:
- Businesses are “profit-minded"
- Businesses have an independent bank account
- Businesses track income and expense
- Businesses keep records
These just about describe any blogger, creative, entrepreneur, photographer, shop owner, mentor, consultant, designer, etc.
If you sell physical or digital products, provide services, offer sidebar advertisements on your site, work with brands or businesses in any way (eg, doing a feature post), or receive compensation in any form (including free product) you are operating as a business according to the IRS.
What distinguishes you as a hobby is if you continue to claim losses instead of profit. If you claim losses two consecutive years in a row, the IRS deems you a hobby and you can no longer get the perks of filing as a business. Hobbies cannot claim financial losses at year-end in order to pay less taxes or receive more of a refund, nor can that new laptop and Adobe software be used as a deduction.
The advantage of filing taxes as a business is that you can claim both deductions for expenses (eg, your fancy new computer) and financial losses (as long as it is not two years in a row).
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