A majority of individuals have several hobbies that they have come to enjoy throughout the years. It is possible you might have even considered using one of your hobbies to help earn some extra income.
If you begin to use a hobby as a source of income, it can sometimes be difficult to determine if it has grown into a business or if it’s just an expensive pastime. It is first important to know the difference between what is considered a business and what is a hobby.
The IRS defines a hobby as an activity that we do for the purpose of enjoyment with no intention of making a profit. While a business, on the other hand, is created with the sole intention of making a profit. In order to help you understand whether your activity is a hobby or a business, the IRS has created a list of nine factors that you can use to determine if they would view the activity as a business. This list is as follows:
- The taxpayer carries out activity in a businesslike manner and maintains complete and accurate books and records.
- The taxpayer puts time and effort into the activity to show they intend to make it profitable.
- The taxpayer depends on income from the activity for their livelihood.
- The taxpayer has personal motives for carrying out the activity such as general enjoyment or relaxation.
- The taxpayer has enough income from other sources to fund the activity
- Losses are due to circumstances beyond the taxpayer’s control or are normal for the startup phase of their type of business.
- There is a change to methods of operation to improve profitability.
- Taxpayer and their advisor have the knowledge needed to carry out the activity as a successful business.
- The taxpayer was successful in making a profit in similar activities in the past.
- Activity makes a profit in some years and how much profit it makes.
- The taxpayer can expect to make a future profit from the appreciation of the assets used in the activity.
It is important that you are able to determine if your hobby should be conducted as a business for tax purposes. For example, a legitimate business can deduct its expenses, while hobbies are unable to do so. If you still have questions after reviewing the above criteria provided by the IRS, we recommend contacting your accounting professional for assistance.