Many cities require every local business to obtain a tax registration certificate. Technically, this rule applies to any money-making activity -- even if you don't intend to claim any federal or state tax deductions for your hobby business. Also, if you sell goods (such as homemade jewelry), your sales will be subject to state sales taxes, which means you'll have to apply for a "seller's permit."

In practice, many microbusinesses -- so tiny that the word "business" seems excessive -- might be able to fly under these agencies' radar. But be aware that, depending on your local rules, you could be penalized if you're caught doing business without the licenses or permits required by your state or local governments. These penalties may include fines and any back taxes that apply.

In addition, getting the necessary licenses and permits will help show the IRS that you really are running a business. For more information, see Obtaining Licenses and Permits.

For detailed information on all the deductions you can claim for a home business, get Home Business Tax Deductions: Keep What You Earn, by attorney Stephen Fishman (Nolo).