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We are living in the age of the "side hustle," where nearly half of our friends and colleagues are building a little something on the side. But at what point does that passion project cross the line into a legitimate business in the eyes of the tax man?

In today’s episode, we dive deep into Internal Revenue Code Section 183, better known as the "Hobby Loss Rules". Understanding the difference is critical because it fundamentally changes how you are taxed. While a business can deduct "ordinary and necessary" expenses and potentially use losses to offset other income, a hobby is generally treated much differently—often leaving you to pay taxes on your revenue without the benefit of deducting your losses.

What we cover in this episode:

• The "Safe Harbor" Test: Does your activity make a profit in 3 out of 5 consecutive years? If so, the IRS generally presumes you have a profit motive.

• The 9 Factors of Profit Motive: We break down the IRS and CRA "profit tests," including the time and effort you expend, your level of expertise, and whether you maintain separate business bank accounts.

• The "Ugly" Side of Hobby Rules: Why being classified as a hobby can lead to a surprise tax bill, even if you’re technically losing money out of pocket.

• Signs It’s Time to Transition: From "making real money" to being ready for a lifestyle change, we discuss when to make it official with a business plan and legal entity like an LLC.

Don't let the "Hobby Loss Pit of Misery" claim your side hustle! Tune in to learn how to document your profit motive and treat your passion like the professional venture it is.

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⚠️ IMPORTANT DISCLAIMER

We are not tax experts, CPAs, or legal professionals. The information provided in this episode and post is for general educational and informational purposes only and does not constitute accounting, tax, or legal advice. Laws and regulations are complex and subject to change. You should always consult with your own qualified accountant or tax advisor before making any business or tax-related decisions based on your individual situation.

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