According to Brad Crowson, a former regional program coordinator at WESST, more than 70 percent of business registrations in Rio Rancho are for home-based businesses. Crowson, who worked one-on-one with new and aspiring small-business owners as a consultant for the nonprofit business development organization, believes the home-based business trend is supported by the widespread availability of high-speed internet, among other factors.

“It’s also, in most cases, fairly low-risk financially and offers significant upside potential for both personal fulfillment and income generation — not to mention terrific tax benefits if structured properly,” Crowson said in a recent WESST blog post.

Many people engage in home-based hobby activities that turn into a source of income; however, to claim tax benefits referred to by Crowson, individuals must demonstrate to the Internal Revenue Service that their activities are intended to make a profit.

The IRS has established factors taxpayers must consider when determining if their activity is a business or a hobby. While no one factor is more important than another, new and aspiring business owners should be aware of some of the ways the IRS differentiates between a hobby and a profit-motivated business. These are some of the differentiators:

• Are the activities carried out in a businesslike manner?
• Does the business owner devote time and energy to make the enterprise profitable?
• Are losses due to normal startup costs or circumstances beyond the owner’s control?
• Does the business owner have the knowledge needed to carry out the activity as a successful business?

Setting up the business properly and keeping complete and accurate financial books are essential to demonstrating that activities are carried out in a businesslike matter. Keeping track of time, especially when devoted to revenue-producing activities, may demonstrate a profit motive. Internal reports that note operational and strategic changes to improve profitability may also bolster a business owner’s intent.  

WESST offers workshops and counseling to give business owners the knowledge needed to start, manage, and grow a profitable business.

WESST’s Technology Toolkit® helps businesses obtain or enhance an online presence through web marketing, social media, and e-commerce, with related QuickBooks bookkeeping support. WESST’s DreamBuilder program combines online and in-person learning to develop business skills. Workshops gear toward new and small-business skills, while personalized business counseling is tailored to the needs of today’s entrepreneurs, especially those just starting out. WESST helps new business owners navigate regulations that legitimize a business in the eyes of government agencies.

More Than Advice

WESST recognizes that one of the obstacles to business development is the difficulty of obtaining capital. WESST helps bridge the gap by offering no-to-low interest rate small business loans to eligible entrepreneurs that work with a WESST consultant. Loans range from $500 to $50,000 for small businesses with terms of up to five years.

Read more about WESST services, and schedule a consulting session.

Find WESST loan criteria here.

Note: This article does not constitute tax advice.

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