Thursday, September 27, 2007

Are you running a small business or enjoying a hobby? Part I

So you have started selling your crafts online. You think this might be a hobby or just something to do for fun. Could you actually be running a small business according to IRS rules? Do you have to pay income taxes on your business or hobby?

You have started your small business online and have incurred costs in running your business. You have had few sales and you expect to have a loss. Do you get to deduct the loss on your income taxes?

Well, according to the IRS rules it depends. You need to consider whether you are engaged in a business or just pursuing your hobby. According to the IRS there are some factors you should consider:

  • Do you run the activity in a businesslike manner? For example, do you have records, a business card, a website?

  • Does the time and effort you put into the activity indicate an intention to make a profit?

  • Do you depend on income from the activity?

  • If there are losses, are they due to circumstances beyond your control or did they occur in the start-up phase of the business?

  • Have you changed methods of operation to improve profitability? In other words, are you trying to find ways to make more money through the sales of your crafts.

  • Do you or your advisors have the knowledge needed to carry on the activity as a successful business? Do you have knowledge in selling crafts? Are you consulting others who do?

  • Have you made a profit in similar activities in the past?

  • Does the activity make a profit in some years?

According to IRS rules, an activity is usually considered a business if it makes a profit (profit = sales are greater than costs and expenses) during at least three of the last five years. So, basically whether you are running a small business or enjoying a hobby depends on your intent and whether your activity makes a profit during at least three of the last five years.

Friday, September 21, 2007

Thinking of Starting a Small Business Selling Crafts?

So you make some really wonderful and unique craft creations and all of your friends encourage you to start your own crafts business. Wouldn’t that be so much fun? You could certainly use the money you make from your sales. That’s what I thought when I took the plunge and decided to make handbags and diaper bags. What I found is that there are several costs related to starting my own business. Here is a list to consider:
· Materials and supplies
· Equipment to make your items if you don’t have good equipment
· Labels for your products (in my case labels for my purses)
· Business cards
· Domain name
· Web hosting
· Digital camera
· Computer
· Internet connection
· Fees to list your inventory on a website
· Shipping materials
· Auction website template
· Last but not least – your time!
o To make your inventory
o To learn how to take good pictures
o To take good pictures
o To write good descriptions
o To determine the price of your items
o To determine the cost to ship
o To list your inventory online
o To ship your sales to buyers
o To promote yourself online
o To maintain business records

What I also found is that competition can be brutal online. When I started out I thought that I had the most unique creations out there. Then I realized that there are hundreds of people out there selling really unique things and that a lot of them are selling them for very low prices. You need to take the time to investigate the market that you want to sell in and whether your product is unique enough and whether you can make a profit with the prices that the market is paying for your product. I found out that my friends are willing to pay me more for my current product line than what I can sell them for online.

So, after you consider all of these factors and do your research, ask yourself whether you really want to start an arts and crafts business. What’s your motivation? Do you want to eventually support yourself from the profits of this business? Do you want to have a profitable side business? Do you want to sell enough to pay for your “habit”? Is this just a hobby? Once you figure the answer to these questions then consider the cost involved and determine whether it makes sense for you to start a crafts business. As for me, I would like to have a profitable side business and I believe that after months of research I have found the type of product I would like to offer online. But more on that later as I start this process. In the meantime, I will continue to sell to my friends at my very successful annual home boutique.

Thursday, September 13, 2007

IRS Tax Guide for Small Business

Everything you wanted to know and more! Tax topics especially for small businesses and home based businesses . Make sure to read up on this one! This is publication 334 from the IRS website.

Legal and Financial Tips for Crafters

So why bother to pay taxes and follow the law? Because it's your responsibility as a business owner to do so. Part of owning a legitimate business is following all applicable local, state, and IRS rules and regulations. Here is a great list of legal and financial tips for crafters published on