Is Your Hobby Secretly a Business? Understand IRS Rules Before You Deduct
- morgan03815
- Jul 28
- 3 min read
You know that hobby you love? The one that fills your weekends, clutters your garage, or makes your friends say, “You should really sell these!”
A lot of successful small businesses started exactly that way — with a hobby. But turning passion into profit isn’t just about slapping a price tag on your creations or services. If you want to truly treat it like a business (and make sure the IRS agrees), there are a few smart steps to take.
Hobby or Business? Understanding IRS Rules and Factors
The IRS draws a distinction between a hobby and a business, and their rules determine how each is treated for tax purposes. And it’s not just about how much money you make — it’s about your intent to earn a profit.
Whether you raise cattle, build custom furniture, grow flowers, sell baked goods at the farmers’ market, or run a creative side hustle online, one of the best things you can do early on is write down your intent to make money. This simple act can help support your case when it comes time to defend your deductions and prove that you’re running a legitimate business.
The IRS considers several factors when determining whether your activity is a hobby or a business, including:
Whether you carry on the activity in a businesslike manner
Your time and effort toward making it profitable
Whether you depend on the income
If you’ve made profits in similar activities before
Whether you can expect to make a future profit
Side Hustles Deserve Respect, Too
Whether it’s a weekend gig or an online shop that brings in “just a little extra,” side hustles are everywhere. And they often start exactly like a hobby — casual, creative, and low-pressure.
But treating your side hustle like a real business from the beginning can set you up for long-term success.
Some simple tips to help you begin:
Open a separate bank account for your business activity
Track all income and expenses
Set aside money for taxes (no one likes surprise tax bills!)
Consider whether you need liability insurance
Write down your goals and check in on your progress
Even if your “little thing” doesn’t feel like a business yet, these steps help keep you organized and audit-ready.
Why It's Worth Getting This Right
Business = More Flexibility
Once your hobby becomes a business, legitimate expenses — materials, supplies, advertising, website costs, mileage — may become tax-deductible.
Business = More Options
When your income grows, you can start thinking about retirement savings, health insurance, or forming an LLC. Starting smart now gives you more choices later.
Ready to Level Up Your Hobby?
If you're ready to treat your hobby like a business, here are a few smart next steps:
Step | Why It's Smart |
Write down your business goals | A clear written goal is measurable, motivating, and more likely to succeed |
Track your money | Makes tax time easier and deductions clearer |
Separate your accounts | Keeps financial records organized and supports your case that it's a legitimate business |
Talk to your accountant early | Saves time, money, and stress down the road |
Bottom Line
Whether it’s baking, photography, crafting, farming, or consulting, your passion deserves more than a passing thought when it comes to finances.
At Overman Bookkeeping, we love helping people turn what they love into something that works for them, not against them.
If you’re wondering where to start (or how to clean things up), let’s chat.
Your future business is calling.
Additional Resources
For more information on hobby income, side hustles, and IRS guidelines, check out these articles: