Will the IRS Say Your Work in Hollywood is a Business, or a Hobby?
How You Manage Your Money Makes a Difference
by by Adam Martin, Director, Abundance Bound, Inc.

You are an artist. You may be an actor, a painter, or a writer, but you are an artist. And of course, you are running a business. Or is it a hobby? Do you know the difference?

If you have a full or part time job and are also working part time in a creative endeavor such as acting, your creative endeavor is either a “hobby” or a “business”. The Internal Revenue Service code contains guidelines for whether your activities are a hobby or a business. It’s in your interest for your creative endeavor to qualify as a business, since a business allows you to declare additional business-related deductions on your taxes which could decrease your yearly tax bill or increase your refund.

But in order to be considered a business, your work and how you manage it must conform to certain guidelines*. The most important of which is how you manage the business money, both income and expenses. If the business is not managed properly and you are audited, the IRS may classify your business as a hobby, resulting in a retroactive loss of tax deductions, additional taxes due, and/or penalties.

How to Run a Business

Large businesses have a business bank account. They keep records of all business expenses. They keep records of all sales. They pay all their expenses from their business bank account. They know when they have made money (a profit) and how much. And you would certainly never see the CEO going out and buying printer supplies from his or her personal bank account.

Do you run your business like that? If the answer is no, then you are most likely engaging in a hobby, and it may be an expensive one. You might be saying, “But I’m no accountant, I’m an actor.” True. However, as painful as it may sound, you can and should learn to manage your business finances like a business, and maintain proper records regarding the business in the case of a tax audit.

The key step in establishing your work as a business, rather than a hobby, is to separate all your personal income and expenses from your business income and expenses. You need to have a business bank account. You do not need to have a corporation in order to open a business bank account, but you may need to register a DBA (“Doing Business As”, the name of your business)**. Registering a DBA is a simple and relatively inexpensive process that helps establish your business as just that – a business and separate from your personal income and expenses.

* This article is provided for entertainment purposes only, and is not intended to replace the advice of qualified tax and legal professionals. Consult qualified accountants and attorneys for assistance in determining whether any activity would be considered a business or a hobby under the IRS code, or for any other matter related to tax law, tax preparation, or tax deductions.
** For more information, visit www.legalzoom.com.

Abundance Bound, Inc (http://www.abundancebound.com) provides financial education to actors, artists and creative professionals. Our goal is to develop a community of artists able to pursue their craft free from the crushing weight of financial stress. Please visit us for additional free resources, and details of our ongoing seminars.