Read this tip to make your life smarter, better, faster and wiser. LifeTips is the place to go when you need to know about Small Business Startup and other Small Businesses topics.
When deciding on starting your own business, take a good look at your focus and your goals to decide whether you have a true business, or a hobby.
A simple rule of thumb:
A business you make money, with a hobby you spend money.
Because the IRS understands that business startups (and other circumstances) may cause Net Operating Losses, they have laid out their own guidelines to help you determine whether your activites are a business or hobby:
*If your activities have produced a profit for 3 of the past 5 years, you may presume it is for profit and is a "business"
*If your activities are treated as a business and you are dependent on the income for your livelihood
*The time and effort you put into your activity indicate that it intended to be profitable
There are other more specific guidelines which you can find in IRS Publication 535.
Why the difference?
Hobby income and business income are both taxable.
Hobby losses are NOT tax deductible while business losses are.