Being that I’ve been working with wedding and event businesses for some time now, I can take a quick review of your incoming and outgoing expenses and tell you if your “wedding business” is really a business. I’m not much of a BSer either, so when I have to hand over the diagnosis of “hobby” to a planner, photographer, or florist, it never comes easy. But I have to tell the truth. And then we get to work on how to fix it so that it’s no longer a hobby.
I decided to go ahead and list (straight from the IRS’s website) their legal and governmental definition of a hobby. Here goes:
“In order to make this determination, taxpayers should consider the following factors:
Does the time and effort put into the activity indicate an intention to make a profit?
Does the taxpayer depend on income from the activity?
If there are losses, are they due to circumstances beyond the taxpayer’s control or did they occur in the start-up phase of the business?
Has the taxpayer changed methods of operation to improve profitability?
Does the taxpayer or his/her advisers have the knowledge needed to carry on the activity as a successful business?
Has the taxpayer made a profit in similar activities in the past?
Does the activity make a profit in some years?
Can the taxpayer expect to make a profit in the future from the appreciation of assets used in the activity?
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.”
Unless you’re breeding horses, that is! Apparently you get a few more years to attempt a profit as a horse breeder. No, I’m not kidding. That’s what the IRS says – for real.
So let’s look at these some of these questions more thoroughly.
—>Does the time and effort put into the activity indicate an intention to make a profit?
Great question. Do you have office hours? Do you actually work during them? Do you spend at least 6 hours a day on your marketing, making phone calls, visiting other vendors, following up on leads? Do you read books on sales and business management, have an accountability coach, and attend conferences for your industry? In other words, are making an honest effort to make this business work and become profitable? Or do you spend most of your time hoping the phone will ring?
—>Has the taxpayer changed methods of operation to improve profitability?
Well have you? You didn’t make a profit this year. And you didn’t make one last year. What did you do differently last year? What will you do differently to stop the financial bleeding this year? Will you do the same things and simply hope for a different outcome? I hope not.
—>Does the taxpayer or his/her advisors have the knowledge needed to carry on the activity as a successful business?
Hmmm. I think I saw the word Advisor in there. Do you have one? Or are you trying to go it alone? If you haven’t been able to make a profit in the past, why aren’t you seeking the help that you need from some trusted sources? There are a ton of options out there. Tax advisors, business consultants, marketing services, website “gurus”, you name it! And there are even great ones that specialize in the wedding and events industry specifically. If you’re already using an advisor, is it time to seek someone else? Or determine if it’s just you! Are you sabotaging your own success?
Now comes the moment of truth. Be honest with yourself. Are you operating a hobby? Or do you have a legitimate business? Let us know in the comment section below.