Almost all photographers start out as hobbyists. We click, learn and practice until we have fine-tuned and honed our craft. We are fueled by a similar desire….the longing to create something beautiful, to freeze a moment in time, to honor what we are experiencing. Then, for many of us, this passionate enjoyment of photography begins to expand in new directions as friends ask us to capture their family portraits and cousins invite us to photograph their new babies. At some point we begin to wonder……can I make a living doing this??
Whether you are operating as a business or a hobbyist, it’s important to understand the differences between the two. Your work may exhibit outstanding technical skills and powerful vision, and you may even take the occasional paying job, but that does not necessarily mean you are in business. Alternatively, even if you are structured as a business, you may be operating more like a hobbyist.
Deciding if you will remain a hobbyist or if you will go into business is a deeply personal decision, but it is a decision that cannot be made without first understanding how the IRS distinguishes a business from a hobby.
The Internal Revenue Service defines the difference between a hobby and a business by declaring the activity a business if it has a “profit motive.” They provide the following guidelines to help you make this determination:
- Does the time and effort 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?
- Do you have the knowledge needed to carry on the activity as a successful business?
- Have you made a profit in similar activities in the past?
- Does the activity make a profit in some years?
- Do you expect to make a profit in the future?
The single most important factor in the above guidelines is whether or not you are engaged in the activity to make a profit. If you have an established business that is doing well, this is probably an easy question to answer. What about for those who only like to take a few paying jobs a year? Or for those of you who are just starting out? Many photographers operate at a loss for at least the first year as they portfolio build and get their name out into the market. How do you prove to the IRS that you aren’t just trying to deduct the expenses of a hobby and some of your personal expenses? Are you still considered a business?
This is when you must consider the complete list of the IRS’s guidelines (Reg. Sec. 1.183-2(b)). More specifically than what is shown above, the guidelines can be broken down into the following 9 factors.
– How the business is run: Do you manage your photography in a businesslike manner? Do you keep books and records? Do you change the way you operate in an effort to be more profitable?
– Expertise: Do you have the expertise necessary to take clients?
– Time and effort: Other than when you are taking pictures (which most of us could do endlessly), do you spend a significant amount of time trying to make your business succeed?
– Asset appreciation: This factor is not very relavant to photographers as we do not invest in many assets. Those that we do invest in, our cameras, are not likely to ever appreciate and be sold for profit.
– Track record of success: Have you ever been in business before? Where you profitable?
– History of income or loss: Did your losses occur because you are still in the start-up phase of your business, or for unforeseen circumstances (such as time off for pregnancy)? If your losses continue even beyond these reasons, in may indicate that you are a hobbyist.
– Occasional profits: Is the amount of income you earn from photography insignificant to the amount you spend on your hobby? (For example, photographing a few families around the holidays probably will earn you an insignificant amount as compared to the investment you have made in your camera and lenses).
– Owner’s financial status: Is your photography work your only source of income? Most people do not base their economic survival on the activities of a hobby.
– Personal pleasure or recreation: This factor is not very relevant to photographers because most of us get a great amount of personal pleasure from photography whether it is for business or pleasure.
After reviewing the above factors, if you determine that you are in fact a business, it is important that you keep solid records in the event of an IRS audit. You will need to be able to show the IRS that you have met the “business” requirements.
So You Think You Are A Business?
The greatest benefit to being structured as a business is that you are allowed to deduct ALL of your business expenses against your business income – even if your business incurs a loss. This can really be helpful in your initial year of operation when you may be making significant expenditures to get up and running.
Starting a photography business is a lot of work. You will have to commit to managing your photography as a business, no differently than you would if you were to open up a coffee shop. There are legalities, licensing, contracts, and taxes to navigate. In addition, you must learn how to brand, how to market yourself and how to keep clients coming back. There are many resources out there (books, mentors, workshops) that can help you set up your business properly to ensure its long-term success. It can’t be stressed enough how important it is to educate yourself in the process.
At the pinnacle of the steps to turning your hobby into a successful business, is establishing a proper pricing structure. As a business you will incur many overhead costs you may not have incurred as a hobbyist such as liability insurance, self-employment tax, LLC fees, etc. You have to structure your pricing model so that you can cover all of these additional costs and still earn enough money for yourself to keep your business going. If you fail to establish an appropriate pricing structure, your business will not survive.
Additionally, the IRS will consider making the “business vs hobby” choice for you if you are claiming business deductions on your taxes and are not turning a profit in at least three of the prior five tax years.
If you can’t show the IRS that you can make money as a professional photographer, they will no longer let you call yourself a “business”.
Want To Remain a Hobbyist?
You don’t need to start a business simply because you love taking photos. For many photographers, the hobbyist space is the ideal environment in which to operate. As a hobbyist, you are free to shoot entirely in accordance with your own creative vision – you shoot for the pure joy of it.
Even if you technically remain a hobbyist, you may take photography jobs from time to time for payment. Any money you earn from your hobby must still be reported as income on your federal tax return. It is considered “income from an activity not engaged in for profit.”
The IRS allows you to reduce this taxable income by deducting legitimate expenses that you incurred in connection with earning hobby income. Please note, however, that you are ONLY allowed to deduct expenses up to the amount of income that you had. Any expenses that exceed your hobby income are considered personal losses and are not deductible from your other income. To qualify for this deduction, you must itemize your deductions on your Schedule A: Itemized Deductions, rather than taking the Standard Deduction. Your accountant can help you with all of this.
Please also note that even if you consider yourself to be a hobbyist, you may be subject to state sales tax requirements. Please check your local guidelines.
What If You Want To Go Back To Being A Hobbyist?
Maybe you’ve tried to give a go as a business and have found that the market simply isn’t there for your business to be profitable, or maybe you don’t find the joy in photographing clients. If this is the case, you can close up shop at any time and go back to being a hobbyist. Every state is different, so please check with your local agencies, but essentially you will simply have to contact your local offices that you registered through to let them know that you would like to close your business. You will pay any sales taxes due, close out your accounts, and contact the IRS to close your Employee Identification Number (EIN). It is important that you retain your records for a period of 3-7 years in the event of an IRS audit.
So Where Do You Stand?
There’s a lot to consider when deciding if you are a business or a hobbyist. Most of the decisions are very personal: What fuels your passion for photography? Will you receive the same personal satisfaction as a business? Do you have a unique and consistent style that clients will pay for? What is the state of your local photography market? Do you have the skills to manage a business? Can you afford to take a risk on starting your own business? Once you have considered each of those factors and more, you must then turn to the IRS guidelines.
Regardless of where you stand in the business vs hobby decision, you can, and will continue to, feed your soul doing what you love. Just as long as you are clear on how you will respond if the IRS decides to pay you a visit.