How to turn your hobby into a tax-deductible business

[It’s as simple as saving some receipts…plus all the hard work of running a small business. / Thinkstock]

If you’re a creative type, a productive nerd, or even just a keen dilettante, you know what it’s like to pour your heart and soul (and savings account) into a passion solely for passion’s sake. But have you ever considered that your creative hobby might save you some cash come tax time?

The next time someone marvels at your latest creation, or wonders when you might start selling your services, it might be time to ask yourself, “Could I make money with this?”

There is no question that turning a potentially profitable hobby into a small business offers you the chance to write off a whole host of expenses you might currently be absorbing for fun. If you think you might be able to make your hobby into a side business, and have it still be fun, you’re in luck! Because what makes fun even better besides saving money?

According to Ontario CPA Leslie Monk, the moment when you ask this question is critical. “It’s all about the opportunity cost; recognizing that moment when you realize you could profit from a hobby so you don’t lose out on the tax benefits,” she told Yahoo Finance Canada in an interview.

ALSO READ: What it takes to turn your passion into a business

Too many people miss out on the chance to save on regular expenses and big ticket items alike by putting off getting serious about their small business until they’re making an income from it. Stop worrying about profit margins and start saving receipts.

If you’re worried that it’s not as simple as that (of course it isn’t, that’s what accountants are for) here are some more tips for getting started on that tax saving today.

Really, though. Start saving your receipts.

The most important thing people need to do right away, after their “ah-ha!” moment, is start saving receipts. Save receipts for anything and everything and just make sure you can identify what they are. When you are just starting out, keep every receipt in its original format - physical or digital - until you have a chance to start processing everything.

“Get in the habit of asking yourself, ‘Does this in any way relate to my business activity?’ and when in doubt, err on the side of caution and keep it,” Monk advises. This includes all your home expenses. If you determine you qualify to claim a business use of your home, you can consider some of your basic living expenses a business deduction.

Figure out what receipts are relevant.

Once you’ve taken the first step to founding a business, you should take some time to start learning the ropes of entrepreneurship. “One of the first things you need to learn about,” says Monk, “are the deductions available to you.” There are a lot of factors that determine what you can and can’t deduct, so now is the time to sit down with a professional to chat about your plans.

The types of receipts that matter will depend on a lot of factors, namely what your business is and how it works. Think tools, materials, memberships, subscriptions, travel expenses, courses, even some food and entertainment. If you get anxious about the growing pile of paper, let someone knowledgeable give you the skinny on the situation.

Do your accountant a favour and get organized.

Whoever you team up with to help out can give you some tips on organizing all this information, something that will work for you both. In general, consider filing all your receipts and bills with the following information: the type of expense, the date received and paid, and the amount paid in Canadian dollars if the bill is in a foreign currency. While you might prefer to file receipts and bills by month for budgeting, it might be easier for everyone come tax time if you keep like items together, each utility on its own, all your receipts from Office Depot in one place, etc.

Up your game.

One of the major benefits of making the decision to take your business seriously early on, Monk says, is the ability to purchase capital assets. These include equipment you might use for your business, like a computer or other expensive tech specific to your new job – sewing machines, photography equipment, drones, surf boards, the possibilities are virtually endless.

So if you’ve been looking for an excuse to treat yourself to something new and shiny that legitimately has the ability to make having a business possible, take the plunge.

Make a plan… and follow it.

Don’t worry if you don’t think your business is going to be booming right away, but if you do want to make a profit, you are going to want a plan. According to Monk, The Canada Revenue Agency requires only “a reasonable expectation of profit” in order to claim business deductions. In other words, you need to be confident that you can make money, eventually, if not immediately.

A solid business plan can not only help boost this confidence, but assist you with the inevitable time suck of entrepreneurial procrastination and planning confusion. And here is where you will answer the true test of the hobby business owner: can you do what you love for work and still love it? Only time will tell, so you may as well get to work!