Are you running a business or just a hobby? The difference between the two is not always clear-cut, but it’s essential to understand the distinction, especially regarding taxes. If you have a side hustle or a small business to turn into a full-time gig, you must operate it like a legitimate business.
One of the main factors that determine whether the IRS considers your business a hobby or a for-profit enterprise is the intent to make a profit. If you don’t profit for at least two out of five years, the IRS may classify your business as a hobby, and you’ll lose valuable tax deductions.
So, how do you demonstrate that your business is legit and you intend to make a profit? The answer is simple: run your entity like a business. That means keeping accurate financial records, developing a business plan, and treating your business like a professional endeavor.
To start, separate your personal and business finances. Open a business bank account and use it for all your business transactions, making it easier to track income and expenses and demonstrate that you’re operating a separate entity.
Secondly, develop a business plan. Your plan should be simple, but it should outline your goals, target market, competition, and financial projections. A business plan helps you focus on your priorities, make informed decisions, and present a clear picture of your business to others.
Finally, keep meticulous records. Accurate record-keeping is crucial to show that you’re making a good-faith effort to run a legitimate business. Keep receipts, invoices, and bank statements to document your income and expenses. Consider using accounting software or hiring a bookkeeper to help you stay organized and track your finances.
To run a successful business, you must demonstrate that you’re in it for the long haul. By professionally operating your business, keeping good records, and developing a business plan, you’ll show the world that your business is legit and you’re serious about making a profit.
