Submitted by the South Carolina Department of Revenue
Even before the pandemic, a majority of U.S. households had a hobby that involved making a product, from artwork and furniture to knitting and crafting, according to Petra, a national distributor of consumer technology.
And some of those hobby products are purchased by friends, family, and strangers. But do those sales mean your clients’ fun pastime is actually a business?
INCOME TAX INFORMATION
The South Carolina Department of Revenue (SCDOR) and the IRS offer the following information to help your clients determine if they should treat their hobby as a business for Income Tax purposes.
Here are some indicators that your clients may have a business:
- They carry out the activity in a businesslike manner and maintain complete and accurate books and records.
- They put time and effort into the activity to show they intend to make it profitable.
- They depend on income from the activity for their livelihood.
- They make changes to their methods of operation to improve profitability.
Here are some indicators that your clients’ activity is more of a hobby:
- They have personal motives for carrying out the activity, such as general enjoyment or relaxation.
- They have enough income from other sources to fund the activity.
Keep in mind, none of the indicators are more important than others, according to the IRS. All factors, facts, and circumstances must be considered, but not all must apply. Find more hobby vs. business indicators at IRS.gov.
When filing an Income Tax return, note:
- If your client receives income from an activity, they must report the income they receive on their tax return – even if they have no intention of making a profit.
- They cannot claim a loss on their Income Tax return for a hobby.
Regardless of whether their activity is a business or hobby for Income Tax purposes, your clients may still need additional licenses to operate:
- They may need to apply for a local business license. Find more information on that process on the South Carolina Business One Stop’s website at scbos.sc.gov.
- They may need to apply for a South Carolina Retail License.
Determining if your client needs a South Carolina Retail License
Your client needs a South Carolina Retail License if:
- They’re selling tangible personal property at retail in South Carolina.
- They’re selling items at a retail event where no admissions fee is charged.
Note: All Retail License holders in South Carolina must collect and remit Sales Tax.
They do not need a South Carolina Retail License if:
- Your client sells their hobby creation at a yard sale, as long as the yard sales are no more than once every three months.
- They sell their items at a special event at which an admissions fee is charged, and they are not selling more than once every 24 months or at multiple locations in the state.
If they only sell their products at craft shows and festivals, they may be eligible for an Artist & Craftsman License instead of a standard Retail License.
For more information from the IRS on the difference between a hobby and a business for Income Tax purposes, visit IRS.gov.
To learn about starting a business in South Carolina, visit scbos.sc.gov/starting.
For more information on South Carolina Retail Licenses, visit dor.sc.gov and dor.sc.gov/event-guide for information on selling at events and festivals.
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