Business or Hobby?

by anna on January 5, 2012

in Anna's Blog

As one of our online stores is on Zibbet, we occasionally read Zibbet’s newsletter. Today they actually had a good article in it titled “Let’s Talk Business“. It talks about 3 groups of art and craft sellers – business people, hobbyists, and those in between the two.

This made me think about differences between a hobby and a business. According to the IRS,

“Generally, an activity qualifies as a business if it is carried on with the reasonable expectation of earning a profit.

In order to make this determination, taxpayers should consider the following factors: [see them here: IRS]

The IRS presumes that an activity is carried on for profit if it makes a profit during at least three of the last five tax years, including the current year — at least two of the last seven years for activities that consist primarily of breeding, showing, training or racing horses.”

So, you didn’t have any profit 3 years in a row out of the last 5 ones, your business is a hobby. I remember, one of my Father-in-Law acquaintances was accused by the IRS of running a “hobby law firm”. Because he was enjoying it, not caring much for a profit.

I do not see anything wrong with having a creative hobby and enjoying it. It can be a wonderful outlet, a safe harbor for one’s soul. Especially for those whose day jobs are leaving them pretty much freaked out and stressed.

The only wrong thing I see is trying to present your hobby as a business. For instance, I see a lot of sellers practically giving their products away for free. Because they make them in the evening after their day job, and just want their materials cost covered. But that creates 2 major dangers:

First, they form a wrong market perception and disrupt informed buying principal. It is like if you’re told: look, here’s a $50,000 Lexus from the dealer and here’s a $200 handmade Lexus from me. I assembled it in my basement! If you really don’t know anything about cars, you” go for it, thinking: “Wow! What a great deal!” And if your handmade Lexus brakes down in 2 months or kills one of your family members, guess what? Most likely, you can’t return it and get any compensation. You’ve been simply deceived. I don’t even mention ton of people who lost their jobs making proper Lexuses due to that choice.

Second, having day jobs and not charging enough for their products, such hobbyists set wrong customer expectations, uprooting those who actually do this for living. Customer, who’s offered a $500 diamond ring, most likely isn’t gonna go a jeweler in 5-th generation who does it as a full time job, therefore selling their rings for $2000. It’s like to work for a week – for free, and tell your boss, who’s trying to give you a paycheck: “No-no, no need to pay, I just do it because I enjoy it!” And guess what? When they’re laid off and suddenly need to make a living out of their hobby, nobody is gonna pay $2000 for what used to cost $500. As a result, they’re starving.

As to me, I’ve always considered myself a professional and doing it “business”. Not that I’d fallen into an extreme, as some artists I’ve seen, who, whenever you ask them anything about their creations, go on enunciating “I do it professionally! I do that professionally!” and so on. I just cut short anyone who tries to challenge my doing it professionally, that’s all :).

After one of the first art and craft contests I’ve won when I was about 8, a holiday ornament created by me, received an honor to be displayed on the main holiday tree. Was a big thing, we kids all were excited about it :). When the guy came to collect the ornament, he went on saying: “You should keep pursuing your hobby!” In a second, I turned at him, hissed like an angry snake and said: “Maybe you do it as a hobby. As to me, I’m a professional!” He was stunned. Hadn’t probably ever met such a nasty aggressive kid before :).

Apart from joking, this IRS statement made Ken and me laugh, because we suddenly realized who’s fitting into that definition just perfectly. The ones you’d never have thought of in a million years. The banks! A lot of them have incurred losses a few years in a row by now.

That, in turn, made me think if their panicking credit card cancellations are not purported to minimize losses and move out of hobbyists’ army. I can hear left and right people complaining about their credit cards being canceled by their banks. So, is it a prevention measure or them banks being plain mean to us? Are they businesses or hobbies?

By every day, our world is becoming funnier and funnier, and I’m never tired to look at it in a quiet amazement :).

How would you define yourself – as a business or a hobby?  Let me know in the comments below!

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