Business OR Hobby
Discover the differences between a business and hobby. Learn how to recognize your interests on business or hobby and evaluate their potential for success.
The lady down the street cooks lip-smacking chocolate cupcakes with gourmet chocolate cream cheese icing. If she invites you and your friends over for beautiful cupcakes placed on saucers with hot chocolate, then it's her hobby.
If she puts a beautiful satin tablecloth on a fold-out table and sits it on the porch with a sign that says $1 each, it's her business.
According to the IRS, a business with any activity carried on with the reasonable expectation of earning a profit.
We will break down a few questions that the IRS has pointed out to consider when determining the difference.
Time & Effort
If the time that you put into what you're doing makes it seem like you are looking to make some money from it, then the IRS is considering it a business. It is also a business, if the effort that you put into the activity, even if it doesn't take a lot of time, directs you towards a money-making venture.
Depend On
Sometimes we do something, like planning a party or singing a song, and a person may unexpectedly give us a few dollars. If you are doing something that may or may not make money, but you consider that revenue as part of your income, you are in business. If you are singing in the church choir, it would be considered a hobby. If you are pursuing your rap career, even doing promo shows, it's business.
Losses
Sometimes people suffer losses that are beyond their control. Usually, a person in the start-up phase of their business will have to invest, even if it's a small amount of money, to get the company going. If the cupcake lady burned her oven up making cupcakes for the church, it would be considered a personal loss. If she burned it up trying to get those cupcakes to the table on the front porch with the dollar sign, it would be considered a business loss.
Operation
The main reason people change how they do something is to lower the cost or speed it up. A person who is occasionally doing something would have no need to be concerned with that type of information. If the lady with the cupcakes is giving them away, she wouldn't care how fast the cooking time is or how much the electricity ran. If she buys things that make it easier for her to cook the cupcakes, she intends to do business.
Knowledge
The IRS says that if you know what you're doing and you're doing it, you're probably in business. This probably wouldn't be a good gauge of business or hobby. We know that we pretty much have the knowledge at our fingertips for almost anything.
History
If you did it before for money, you would probably do it again for money. If you are in any activity that you have ever made money doing before, you are instantly considered in business.
Range
Some things that we invest our time and effort into will not be finished warming for years to come. Some unique models of cars and boats may take years to complete, even if you do not want to make any money with them. Some inventions may take years to develop a working model, as well as some experiments may not be successful for years to come. You are still considered to be in business from the day you get started.
Equipment
Sometimes, we can have fun creating things, like t-shirts or gourmet popcorn, that we will just make for our family and friends with no expectation of making any money. You have to consider, though, if you ever sell the T-shirt machine though (or the t-shirts), you have now engaged in the business activity of buying and selling.
More often than not, when people invest their time and energy into a project, they're looking for a return of some kind. Be careful to record all the activities regarding your business venture, so that you can reap all the benefits of entrepreneurship.
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In conclusion, whether something is pursued as a business or a hobby depends on the individual's goals, commitment, and expectations. A business typically involves a profit-driven mindset, requiring consistent effort, investment, and planning to achieve financial success. On the other hand, a hobby is driven by personal passion and enjoyment, without the pressure of economic gain. While both offer fulfillment, blending a hobby with business can lead to a rewarding career, but it's important to maintain a balance between enjoyment and responsibility. Ultimately, the choice depends on one's aspirations and willingness to embrace challenges.
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