Turn Your Hobby Into a Tax Break

by Thom Hiatt

When you are not at the office, what do you love to do? What are you passionate about? What really gets you fired up with a big smile?

After reading this article, you might want to turn that hobby of yours into some decent tax savings this next April. But before we go on, please be reminded that we are not lawyers, accountants, or fire fighters. Talk with those folks before making any life-changing decisions…

We’ve written before about starting your own business, and that may be the right thing to do for some folks, especially those who have been out of work for a while and just can’t seem to find their next job. But what if you are already gainfully employed and you have no intensions of leaving your gig? Well, that little kick-around weekend hobby of yours might put some extra bucks in your pocket.

We practice what we preach: The two co-owners of Twin Bees love what they do during they day, AND they also have successful hobby businesses on the side. One is in the entertainment business and the other is into crafts. These “side” businesses are not in place out of desperation or need, but really because of want and fun.

Sam the Self-Improvement Guru

Sam works each day from 8 to 5 at the local auto-insurance office. He’s been with the company for 19 years and he loves what he does. His coworkers are great and the commute is not so bad. After work, Sam likes to play tennis and also jump into good books, especially books about motivation and self-improvement. He’s read all the best sellers from Tony Robbins, Steven Covey, and the like. For Sam, what’s better than reading the books, is taking what he’s learned and sharing ideas with others.

Sam has a simple blog web site where he jots down his thoughts and creative inspiration. He tells the world about his own frustrations and how he makes improvements using various strategies he has learned in books. After writing casual articles for a couple of months he noticed that his friends were really enjoying the updates. Sam found out that he could place some automatic advertising on his blog. This way when a reader clicks on an ad, Sam can make a little money. It wasn’t a lot at first but it started to add up.

A year later, Sam realized he had quite a following and he decided to put out a monthly “Help Yourself — Help Others” email newsletter. That list grew to about 500 people. And a few local businesses now advertise inside of the newsletter.

One night at a cocktail party, Sam had the idea to give his own seminar about inspiring teenagers. So he asked his church pastor if he could cheaply rent some space in the church hall. Sam picked a Saturday morning and began to advertise it both on his blog and in his newsletter. “Free attendance if you bring a teenager!” More than 75 people showed up including about 25 curious teens. The event was action-packed and info-filled. Guests had a great time and filled out a survey which reflected their continued interest.

Sam now offers monthly seminars on a variety of motivational and self-help topics. Guests attend for only $10 each. The seminar is audio- and video-recorded, and he sells CDs and DVDs of previous events. After each seminar, Sam goes to breakfast with a handful of selected community business leaders. Today, Sam’s revenue channels include:

  • Click-Through Advertising Revenue on his Blog
  • Display Advertising Revenue within his Newsletter
  • Attendance Fees at Seminars
  • Retail Sales of CDs and DVDs
  • Membership Fees to be part of Sam’s Leadership Breakfast Group

Tax Savings Sam

Sam may be making money with his hobby, and he must report those earnings and pay taxes on them… but what what about the tax saving? He has a 4-bedroom house and only two children, so Sam uses the 4th room as his home office where he operates his Guru business. Instantly, tax deductions can come from:

  • Percentage of the Mortgage based on the square footage of the home office
  • Investments in computers, printers, monitors, keyboards, cameras, videocameras, memory cards, etc, all of which are necessary for the blog, newsletter, flyers, and seminar recording.
  • The cost of paper, ink, pens, stationary, etc.
  • Desk, chair, wastebasket, floormat, artwork, coffee machine, clock, etc.
  • Cell phone and landline to communicate with guests and leaders
  • Miles driven to and from seminars, breakfast meetings, bookstore, etc.

What if I don’t make a profit?

In the United States, the government allows you to lose money for two out of five years in business. So technically if you start a business and lose money for the first two years, you are following the rules and you can take the home office deductions. In other words, Uncle Sam does not want you operating a losing business year after year after year and still take advantage of the deductions and tax breaks. But Uncle Sam realizes it’s not all roses out there, so he allows you two bad years.

For additional ideas check out the thinking over at LifeHacker and on WikiPedia. Also, you may have forgotten about your local library. But they still exist and they are still awesome. Make a visit and choose from dozens of great books about turning your hobby or passion into a legitimate, tax-saving business.