News By Tag
News By Location
4 Steps to Take When Your Hobby Becomes a Business
Thinking about turning your love for cars or cooking into a full-time venture? Here's what you should keep in mind.
By: Edward Jones
Do you love restoring furniture? Or are you such a good cook that friends ask you to cater their events? If you have a hobby like one of these, you put a lot of time and effort into it. But did you ever think it could evolve from a fun activity to a profitable business? If you ever decide to go from weekend hobbyist to working professional, though, you'll want to make the right moves to take full advantage of your new status.
To begin with, you'll need to know when your hobby can truly be called a business. Actually, it doesn't take much. Generally, an activity qualifies as a business for tax purposes if it is carried on with the reasonable expectation of earning a profit. And if the activity makes a profit during at least three of the last five tax years, including the current year, it would be considered a business. Once you're a business owner, consider the following steps:
1. Create a retirement plan
During your previous working years, you may have contributed to an employer-sponsored retirement plan, such as a 401(k). Now, if your hobby turns into a business, you can start your own plan – and you may have several good options. Depending on the specifics of your business – amount of earnings, number of employees, and so on – you may be able to open an employer retirement plan that can offer tax benefits and provide you with a disciplined way to help save for retirement.
2. Explore credit, cash management options
You will find that maintaining an adequate cash flow to invest in or expand your business can be challenging. Consequently, you may need to explore some lending and cash management solutions, such as opening a personal line of credit1 or acquiring a business credit card. You may also want to consider opening a money market or FDIC-insured2 account to provide needed liquidity and convenient access.
3. Insure yourself - and your business
You've put hard work, energy and passion into your business. You may want to consider making sure your business is prepared to face financial challenges that may arise in the future. That could include more sophisticated plans such as insurance. For example, if you ever take on a business partner, and you'd like that partner to take over the business upon your passing, you could establish a "buy-sell" agreement, funded by life insurance3, so that your partner could then buy out your surviving spouse or children. Of course, you will want to consult with your legal advisor before establishing such an arrangement.
4. Take all your deductions
When you work for a company, your employer pays a portion of your Medicare and Social Security taxes. But when you're self-employed, you pay both the employer's and the employees' share of these taxes. However, you may be able to deduct half of your self-employment taxes — the employer's portion — from your net income. Additionally, as a business owner, you may be able to claim a variety of other deductions, including retirement plan contributions, health insurance premiums, transportation costs, education and training expenses, and so on. And if you work out of your home, you may also be able to deduct other expenses, such as a portion of your telephone and Internet costs. Your tax advisor can help you determine which deductions you can take4.
Converting your hobby into a business can be enjoyable, exciting and potentially rewarding. An Edward Jones financial advisor can help you with many aspects of this conversion.
1Our Personal Line of Credit is a margin loan and is available only on certain types of accounts. Investing on margin or using a margin loan involves risk and is not appropriate for everyone. You can lose more funds than you deposit in the margin account. If the value of the securities in your margin account decline, you may be required to deposit cash or additional securities. In the event of a margin call, the firm can sell securities or other assets in your accounts and can do so without notice to you. You may not be entitled to choose which securities or other assets in your accounts are liquidated or sold to meet a margin call. The firm can increase its maintenance margin requirements at any time and/or not grant an extension of time on a margin call. Interest will begin to accrue from the date of the loan and be charged to the account.
2The FDIC insurance limit applicable to any deposits (including certificates of deposit) that you maintain in the same capacity directly with a bank, or through an intermediary (such as Edward Jones or another broker-dealer)
3Edward Jones operates as an insurance producer in California, New Mexico, and Massachusetts through the following subsidiaries, respectively:
4Edward Jones, its employees and financial advisors cannot provide tax or legal advice. Consult an attorney or tax advisor regarding your situation.
Edward Jones - Matt McDonald: Financial Advisor