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Dave Ramsey, author of New York Times best-selling books Financial Peace, More Than Enough, The Total Money Makeover and EntreLeadership, answers business and financial questions for TwoTen readers.

When A Hobby Becomes A Business

Dear Dave,
     In your opinion, how do you know when a hobby officially becomes a business?

— Dan

Dear Dan,
     This is a great question. But when it comes to something like this, my opinion doesn’t matter nearly as much as what the Internal Revenue Service says.
     According to the IRS, if you run a business for two years or more without making a profit, then it is not a business. You have to become profitable at some point. Otherwise, the IRS will declare your endeavor a hobby. Personally, I think that’s a pretty good marker. I mean, if you’re making money at something, it’s a business. It’s an income.
     Now, I’m not talking about little tidbits, like making a doily for a friend for $5. But if you’re at the point where you’ve created an online store, or have a Pinterest strategy for displaying your product and making sales internationally, then your little hobby has become a business. But a business that doesn’t make money is simply a hobby. The difference is profit. And you need to become profitable in a reasonable period of time. If this doesn’t happen, you should probably just back up, admit your intent isn’t for profit and think about focusing any business aspirations you have somewhere else.
     Still, there’s absolutely nothing wrong with having a hobby as long as you realize that’s what it is and you don’t let it negatively impact your financial well-being. Lots of people collect or make things, and it’s a stress reliever—it’s fun. They had no intention of making a profit from day one. Just make sure you love whatever it is you pour yourself into. Then, if it turns into something that’s a moneymaker, you’ll have the satisfaction that goes with loving what you do for a living. That’s a great feeling!

— Dave

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