Is your writing hobby actually a business? And does it really matter? Absolutely! Especially if you want to save a bit of tax while you’re getting your business up and running.
So you’ve been earning a bit here and there with your self-published books or maybe bloggers have been paying you to write posts for them, but when you look at the money you’ve spent to publish those books or the tools you’ve paid for to run your freelance writing business, you realize you haven’t broken even, so you decide not to include your writing “business” on your taxes.
This can be a big mistake!
Choosing not to keep track of income and expenses properly or simply not worrying that your business lost money can cost you a tax refund.
Let me explain...
What is a hobby?
I’m pretty sure you know what a hobby is, but here’s a reminder. It’s something fun that you enjoy doing and you don’t earn money at it. As soon as you cross that line and start accepting money for something you do as a hobby, you’re now a business owner.
Now, you might be thinking, “If I include all the costs I incurred to publish my books, write those blog posts, make those art cards, etc., I actually lost money, so why does it matter?” I’ll get to that shortly, but first, I want to share the definition of a business.
What is a business?
Granted, there are various definitions of a business, but where it matters most is in the tax law, because that’s where most people make the mistake of thinking it doesn’t matter that they lost money.
Most governments define a business as engaging in trade with the intent to earn a profit. If you live in Canada, here’s a short article from our friends at the Canada Revenue Agency that answers the question, “What is a business?” If you’re not in Canada, don’t worry. The idea of a business engaging in trade to earn a profit is universal.
Why does it matter?
Alright, let me get to the point already. Why should you care if you are running a business that has losses? Clearly if you are earning a profit then you are operating a business but why does it matter if you have losses?
You could be missing out on tax savings!
Yes! In Canada and the US (and potentially many other countries), if you have losses from starting a business in which you intended to earn a profit (of course you intended to earn a profit!) they can be deducted against other forms of income which could result in a tax refund.
That’s right. If you have a business loss and other forms of income (this is very common when you have a day job and start a side hustle), you may be eligible for a tax refund. Of course, this all depends on your unique tax situation so please check with your local professional accountant.