This is the second article in a monthly series feature on Bookkeeping and Accounting in Your Yarn Related Business (BAYYRB). This monthly article will be published the first Wednesday of each month.
The IRS has strict guidelines for determining whether an activity such as a yarn related business is an actual business (something you entered into in order to make a profit) or a hobby (an activity not entered into in order to make a profit).
Unfortunately, both knitting and crocheting are considered a hobby. According to Wikipedia a hobby is an activity, interest, enthusiasm, or pastime that is undertaken for pleasure or relaxation, typically done during one’s own time.
Because both knitting and crocheting are both considered hobbies you are going to have to “prove” to the IRS that your yarn related business is something that you started in order to make money (a profit) from.
Please be advised that I am NOT a CPA (Certified Public Accountant), but rather a long time bookkeeper with my own yarn related business. Please consult with your OWN CPA/Tax Preparer for additional information.
In simple terms, someone who knits or crochets mainly for something to do (pleasure) and sells their items for the cost of the yarn and maybe a few bucks for themselves and perhaps does a couple of craft shows a year to sell the finished items would be considered a hobbyist. The money they make from selling their items should be reported as income on Line 21 of 1040 and appropriate deductions are claimed as Itemized Deductions on Schedule A of Form 1040. There are limitations, so please consult with your own CPA for details.
On the other hand, as someone who is serious about creating a yarn related business you probably have:
- chosen a business entity type (sole proprietor, LLC, or perhaps even a S-Corporation)
- have registered your business with various Federal and State Tax Agencies
- can claim expenses (other than the cost of yarn) that you can prove are directly related to your business (perhaps monthly website hosting fees, the cost of a domain name, advertising expenses, printing expenses, membership fees, the cost of purchased patterns, State filing fees, etc.)
- documentation proving that the time and effort put into the activity (your yarn related business) indicates that you intend to make a profit.
Consult with your own CPA regarding the necessary forms and documentation that you will need to complete to report income and expenses from your business as these will vary depending upon the business entity type you have selected.
The IRS presumes that a business is carried on for profit if it makes a profit during at least three (3) of the last five (5) tax years, including the current year.
In either case, you must keep detailed records – so next month we’ll discuss your “stash” and how the IRS views it.
Until then…..happy hooking 🙂