For many small business owners, the business is more a labor of love than a reliable source of income. This is most often the case when the owner has other means of financial support - such as a regular job or a working spouse - which allows the microbusiness to continue even though it makes little or no money. These types of tiny businesses are usually run from home (renting an office would be too expensive) and are often based on activities near and dear to the owner, which has earned them the nickname " hobby businesses."
There are as many types of hobby businesses as there are hobbies. A basement jewelry studio, a jazz band for hire, or an antique refinishing business might all qualify. The owners would probably continue to make jewelry, play jazz or restore antiques on their own time and money, but are trying to turn their hobbies into profitable businesses.
Making the Most of a Losing Business
For most regular businesses, more than a year or so of losing money is a cue to close up shop. But if you love doing whatever you're doing, it might make sense for you to stick with your losing business rather than fold it up. That's because an unprofitable business can be a tax shelter.
If you have another source of income, the losses from your hobby business can be used to offset your other taxable income. Business losses - including everyday expenses and depreciation on capital assets - can often be deducted from your other taxable income. That can not only lower the amount upon which taxes are calculated, but also may drop you into a lower tax bracket.
Of course, most entrepreneurs would much rather earn a healthy profit than lose money with their business. And the savings made possible by a tax shelter do not always justify continuing a marginal or losing business. But they definitely can make a difference when you're deciding whether or not it's worth it to keep your unprofitable - but enjoyable - business going.
For example, take the case of Kay and her husband Reza. Reza earns a salary as a chef in a local restaurant, and Kay is a magazine editor. They file joint tax returns.
Kay has a passion for plants, and decides to try making a business of selling some of the hundreds of plants she grows and propagates in her backyard greenhouse. After she spends thousands of dollars on exotic plants and better lighting equipment, the greenhouse heater goes on the fritz and over 300 of her expensive exotic plants die. Her expenses for the year total nearly $10,000, and she has sold only $200 worth of plants.