Many successful home based businesses started out as someone's hobby. At the same time, many hobbies never were intended as businesses. However if you have a "profitable hobby" that boosts your disposable income, you should be sure to commit to some simple bookkeeping rules to enable you to deduct losses when you lodge your tax return. So you need to understand when you can claim a loss for your hobby.
Obviously you must report any profits to the taxation authorities - however if your hobby is not yet a "business" you can't carry losses forward as you can only operate on a cash basis i.e. your taxable profit is simply this year's sales less this year's cash expenses. On the other hand, if you have a "hobby business" you can deduct depreciation and carry forward losses (if any) into future years.
A home based business can pretend for years that it doesn't have to pay taxes on profits, but when it becomes obvious that you are running a business for profit, and you decide to lodge a tax return, you will have so much infrastructure in place you won't be able to pretend that this is your first year in business. Then back taxes can be huge!
To avoid being caught in the trap of having to pay a massive tax bill covering prior years, you should start thinking early that you must lodge tax returns. The overriding determining factor that the authorities use to determine whether you are operating a hobby or a "profitable hobby" as a small business is whether you are engaged in the activity for profit. The most straightforward test that is applied in determining profit motive is whether the hobby showed a profit in at least three of the last five taxable years. Failing this test, a ''facts-and-circumstances'' approach can be used which looks at various factors related to the business.
Textbooks vary on these factors, but the most important ones appear to be:
1. Is the business conducted in a business-like manner? For example - are records kept?
2. Does the owner have expertise or seek the assistance of experts?
3. Does the owner invest much of his time or effort in carrying on the business?
4. Losses can be justified if the taxpayer can show that the business itself has become a saleable asset.
5. Previous success at other business ventures is also a determining factor.
6. The taxpayer's history of running the business is considered.
7. If profits are earned, but infrequently and in small amounts, the profit motive in the long run is in question.
8. The extent that the business is important to your overall earnings potential is also important.
9. The element of personal pleasure or recreation is also a factor.
Hobbies can be fun and profitable and, in years with losses, even deductible. Just be sure and consult your tax accountant if you find your hobby is becoming a "profitable hobby."
Bernard Kelly BEcon MBA CRPC Australia's Retirement Strategist�, is a highly sought-after property advisor, retirement authority, thought-leader, author and radio commentator who believes in the future it will be necessary to have additional income streams to provide for 20-25 years of comfortable retirement.
http://www.retirelaughing.com.au/blog/make-money-with-my-hobby/
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http://EzineArticles.com/?Taxes-and-Your-Profitable-Hobby&id=5780946] Taxes and Your "Profitable Hobby"
