Are your creative endeavors a hobby or a business? Hobbies bring us joy and fulfillment. If you want your creative endeavor to be a hobby, something that brings you joy when you have time to pursue it, that’s great. However, treating your efforts like a hobby creates different tax treatments than if you want your talent to be a career or side hustle. If your activities are part of a business, your losses can be greater than your gains, but if it’s a hobby, you can only take losses up to the amount of income you earned.
Specifically, let’s assume you are a visual artist and your expenses last year were $1,000, and your income was $100. If your painting is a business, you can take a $900 loss on your personal taxes. If your painting is a hobby, your $100 won’t be taxable, but you can’t take a deduction on your taxes. Classification matters.
The ability to take a loss causes the IRS to have strict rules around treating your creative activities like a business. You will see a link to a recent news release at the end of this post. In addition to this link, check out other resources, and the opinions of your CPA.
First, you must treat your creative activity like a business and keep records and receipts of all income and expenses.
Next, you must devote significant time to your activity, like you would any other job. Keep records of the time you spend. The more specific your time recording is, the more it will look like legitimate information.
The IRS wants you to depend on income from the activity for your livelihood, and it also wants you to have income from other sources sufficient to cover any losses sustained by your creative endeavors.
Normal startup losses are expected, but the IRS wants you to demonstrate that you are taking steps to move toward profitability. Taking classes, entering contests, or increasing marketing would be good ways of demonstrating these efforts. Again, keep your receipts and any feedback you receive.
The IRS wants you to be profitable, at least some of the time, or show how you can expect to make a profit in the future. If you’re struggling, keep excellent records showing that you are trying. If you don’t, the risk of an audit substantially increases.
Finally, the IRS wants you to show that you have the knowledge you need to run a successful business. Purchasing my book, 52 Weeks to Fearless—What Creatives Need to Know About Money, is an excellent step! Keep your receipt.