Business vs. Hobby: Factors the IRS Considers

A hobby is an activity that someone pursues because they enjoy it without any intention of making a profit. A business, on the other hand, is operated to make a profit.

 

How can you tell the difference between the two? Here are the factors the IRS considers:

 

  • Does the time and effort put into the activity reflect a desire to profit from it?
  • Do you keep accurate books and records of the activity?
  • Do you depend on income from the activity?
  • Were there losses from the activity, and if so, were they beyond your control?
  • Have you changed your approach to the activity to increase profitability?
  • Do you have knowledge and skills needed to carry out the activity successfully?
  • Have you made a profit in the past from similar activities?
  • Does the activity make a profit in some years, and if so, how much?
  • Can you expect future profit from the appreciation of assets used in the activity?

 

All circumstances of the activity are considered and no one factor is weighted more heavily than the others.

Tax Implications for Hobby Activities: Regardless of whether your activity is a business or a hobby, if it makes any money at all, you must report the income on your tax return. While income from hobby activities must be reported, hobbies do not qualify for tax deductions.

Tax Implications for Business Activities: If your activity is considered a business and not a hobby, you are allowed to deduct expenses associated with it. Business tax deductions include operating expenses such as home office and supply costs, work-related travel expenses, phone and internet expenses, professional fees, rent, interest, depreciation, and the costs of advertising and promotion. In order to qualify for these deductions, you must set up your business through your state and/or city’s business licensing office and register your business with the SCC.

 

From establishing a business to taxation issues, our attorneys can help with every aspect of forming and running a business. Contact us to schedule a no charge consultation so we can assist in making your business dreams come to life - legally.