{"id":15945,"date":"2019-06-02T21:01:05","date_gmt":"2019-06-02T21:01:05","guid":{"rendered":"https:\/\/tavasllc.com\/?p=253"},"modified":"2026-10-05T13:40:45","modified_gmt":"2026-10-05T18:40:45","slug":"build-your-brand-not-your-hobby","status":"publish","type":"post","link":"https:\/\/legendcreative.com\/dev\/tavasllc\/build-your-brand-not-your-hobby\/","title":{"rendered":"Build Your Brand, Not Your Hobby"},"content":{"rendered":"

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Build Your Brand, Not Your Hobby<\/span><\/h2>\n

Are you engaged in a trade or business and subject to self-employment taxes, or are you participating in a hobby and subject to net investment income tax?\u00a0 Often, TAVAS’ clients must confront this tax version of Sophie\u2019s Choice.\u00a0 Even the co-producer of the Grammy-winning song \u201cMidnight Train to Georgia,\u201d had to provide substantial evidence, from various sources of income, and demonstrate how he ran his company in a \u201cbusiness-like manner\u201d and eligible to claim deductions as a trade or business.[1]<\/a> Under the same standard, the relevant facts and circumstances disproved an author\u2019s assertion that certain income derived from her hobby. Both cases illustrate how the IRS will stack the odds against you unless you keep meticulous business records, and seek proper tax advice.<\/span><\/p>\n

Under \u00a7162 and \u00a7212 of the Internal Revenue Code (\u201cIRC\u201d), you may deduct ordinary and necessary expenses generated by your trade or business.\u00a0 Generally, you may deduct the costs from activities engaged in for profit, but may not deduct expenses for dealings primarily engaged in as a hobby, or for recreation.\u00a0 As such, the IRC defines hobbies as activities not pursued for profit.\u00a0 Section 1.183-2 of the Income Tax Regulations includes a nine-factor list to determine whether your undertakings are engaged in for profit. \u00a0As discussed in another article, \u201cDeduct What You Love, With Hobby Losses,\u201d<\/em> if you have a reasonable expectation of profit and demonstrate a profit-seeking motive, then the IRS generally maintains that you are pursuing a vocation and allows you to deduct the associated expenses.\u00a0 Otherwise, you have a hobby, and may only deduct costs to the extent of your hobby-income.<\/span><\/p>\n

Depending on how you file your taxes, you may owe self-employment or payroll taxes on the income you receive from your trade or business.\u00a0 Alternatively, you might owe net investment income tax on income from your hobbies.\u00a0 Specifically, royalty income not earned in the course of the taxpayer\u2019s trade or business is not subject to self-employment tax, but is subject to the Net Investment Income Tax reported on Schedule E (Form 1040) as \u201csupplemental income,\u201d and is taxed as ordinary income.\u00a0 What happens when someone tries to bifurcate their income between investment income subject to net investment income tax, and trade or business income subject to self-employment tax?<\/span><\/p>\n

In Barker v. Commr. of Internal Revenue<\/em>, Cecile Barker kept financial records of SoBe\u2019s ventures and his full-time involvement with the company. \u00a0However, he needed to prove that the business expenses were ordinary and necessary costs incurred from the company\u2019s operations to be entitled to the deductions he claimed.\u00a0 The business was an entertainment company that built artists\u2019 brands.\u00a0 The company entered into contracts with influencers, writers, and the Isolation Network to produce, promote, and distribute music for its signed artists.<\/span><\/p>\n

To claim deductions as business expenses under IRC \u00a7162, you must be engaged in a business for profit.\u00a0 Whether you can demonstrate the requisite profit-seeking motive to the IRS does not depend on your business making an actual monetary profit.\u00a0 SoBe was not profitable from 2002 through 2011.\u00a0 The IRS argued that the company was Mr. Barker\u2019s hobby, and thus could not deduct its business expenses or losses.\u00a0 He responded by proving that he worked full-time to build SoBe\u2019s brand.\u00a0 At litigation, Mr. Barker produced;<\/span><\/p>\n