A hobby is not a source of income. When do you know you are working on a hobby instead of a taxable source of income?
A hobby is not a source of income
This might be an open door for you. However, not to everybody. We are often contacted by persons that organize healing sessions, study aid, piano lessons, Pilatus training, mental wellness. Not every person has the capability to actual turn this in volume turnover. In the situation the costs of renting a room, travel expenses, office equipment exceed the turnover, a loss is being made.
A loss made is not a problem when there is to be expected a profitable income. The future profitable income can be set off against the loss.
Most starting companies do not show immediately a positive result. If you look at every available business plan, it is always the hockey stick model. You start with zero result, then a loss, more loss, less loss and in year five a good result.
Hobby versus reality
Reality learns especially the Dutch tax office that not everybody is able to meet the hockey stick model. Often it is more a downhill slope.
The hockey stick model makes that indeed in a reasonable period of time, often three years, a positive result is shown. That said, if the result is marginal it is indeed positive, but is it positive enough? When no positive results can be shown, then it is regarded a hobby.
A hobby versus source of income – court case
In 2010, 2011 and 212 an author that published his own book made losses. These losses can be set of against other income the author could have had. Income such as employment income that funded the publishing activities.
The tax office set a deadline for this loss making author. In case 2013 should result in a loss as well, the company is assumed to have been dissolved as per December 31, 2013.
In the 2014 income tax return the author continued to deduct another loss year. The tax office denied this loss. The author appealed and went to court. Even for the higher court it was obvious this activity cannot be regarded a source of income. Hence the loss made is no longer taken into account.
We think tax-is-exciting, making losses is not. Please mind the time line of the above. The issues is caused in 2013 and only finished last week (January 2021). Living on the edge can be tempting, the legal strings are not.
We also have clients that operate a hobby. When we then inform them no longer to report this “income” they are surprised. It was never their intention the activity to become a hobby. It was reality that proofed the activity not to be self-supporting.