Every successful handcrafted business started as a hobby. Making the move from hobby to business always begins with the same question… I wonder if I can make money doing this? Those who believe it’s possible will then sign up for a few craft fairs with a goal of putting a few extra pennies in their pocket while showing off their creations.
But does that make you a business in the eyes of the IRS? The answer is no; you are simply picking up a few bucks from the sale of handcrafted items. And, although this income should be reported on your annual tax return, it does not belong on a business schedule. Yours is a hobby that produces occasional income. Hobby income is never business income.
According to the IRS the dividing line between hobby income and business income is clear; a business is always profit motivated. And, a business that has profit as its main motive is always looking for ways to increase their income, even if theirs is a part-time activity.
Today’s money is generally not the primary goal when you are in business; most small business owners are building their business for tomorrow. Sure, everyone needs a paycheck, but in order to be successful in business, investments must also be made in that business. Advertising, promotion, new or additional inventory, business classes, networking expenses, and necessary equipment purchases all show that you are trying to grow your business.
Trip expenses that outweigh any potential for profit, the lack of a formal business plan, running your finances out of your personal bank account, and not having a set working schedule are all signs that your goal is not profit minded.
At tax time, the crafter who qualifies to claim their income on the business form is allowed to deduct most losses within their business, even if those losses are more than the income earned. For a crafter still holding a regular job, this will lower the taxes on W-2 income. A hobbyist may only subtract the costs involved in creating items sold, up to the amount of income earned from that same hobby.
Because making money from handcrafted items is classified as a hobby by the IRS, the tax return of a hobbyist turned business owner could be pulled for an audit. If that happens, the IRS will ask you to prove that you are operating as a business. For the crafter with good records that’s an easy audit to win.
So, let your spirit flow when you design your jewelry, but when it comes to the bottom line, if you want to be in the business of handcrafted jewelry remember what the IRS says… acting like a business is the only way you get to file as a business at tax time.