Melinda loved to cook and bought all the equipment needed for a quality kitchen.
When one of her friends offered to pay her for catering a birthday party, Melinda was excited.
Next thing she knew, she had a small business going.
Though she didn't charge much and, consequently, didn't make much, Melinda started to worry.
Should she claim her income? Is Your Hobby a Business? Though you think it's just a hobby, the IRS may have a different opinion.
There are some positives with your hobby being a business, including some tax relief options.
However, the difference is especially important if you claim tax relief deductions from other income for hobby losses.

• "3-5" test - If you make a profit three out of five consecutive years, your hobby is considered a business.
  If you report it as a business, but fail the "3-5" test, there are other ways to prove that you're trying to make it profitable.
  
• Keeping financial records
• A separate bank account for the business
• Having the appropriate licenses and permits, such as a "seller's permit" or tax registration certificate

Though the tax relief options are many - deductions for your home office and equipment, to name two - so are the possible pitfalls.
For instance, most cities require a business permit.
If you've been running your hobby as a business without a permit, whether you're claiming it on state and federal taxes or not, you may be liable for penalties should the city become aware of your activities.
These penalties may include any back taxes that should have been paid, as well as fines for operating without a license.