The line between a hobby and a business is sometimes blurred. But it does matter, for several purposes.
Estate Planning Attorney Marc Sherman recommends that you review the activities for several purposes:
If the activity involves even a simple attempt to make a profit, or there is a future expectation of a profit or of appreciation in the assets used in the activity, then treat it as a business. Consider potential liabilities, whether those concerns are covered by insurance and how the activity will be operated if you become incapacitated or pass away.
Considerations? Your Power of Attorney, your Living Trust and your Last Will and Testament. And, depending upon the significance of risks involved (equipment used? product sold or given to others? branding and disclosures?) consider using a limited liability company. Also, if your activity involves others, such as partners (volunteers or otherwise), be careful and have the expectations identified in a writing so that there is less chance of disputes later.
Sherman also recommends that following the discussion with your Estate Planning Attorney, you make an appointment with your accountant. Discuss any losses that may be able to be considered for your tax filings. Is there depreciation that may be taken for any of the equipment or other assets? What kind of books and records need be kept?
Does your business use a payment app, like Square, when the personally made product is sold at a local fair or market? What you considered as a hobby now looks more important for your accountant’s discussion when you receive an IRS Form 1099-K, or a Form 1099-DA when payment is received in the form of digital assets.
Leave the drama for the movies and television series. Enjoy your activities and avoid issues later.
Attorney Marc Sherman is available for discussion. Reach out to him at msherman@mshermanlaw.com.