Hobby or Business?

Do you have a hobby you enjoy that you’d like to use for income? Do you know you may be able to write off expenses you incur as business costs?

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 is done for the purpose of enjoyment with no intention of making a profit. While a business, on the other hand, is created with the intention of making a profit.

In order to help you understand whether your activity is a business or not, the IRS has created a list of nine factors that you can use to determine if they would view the activity as having tax deductible costs. This list is as follows:

·         You carry out the activity in a businesslike manner and maintain complete and accurate books and records.

·         You put time and effort into the activity to show you intend to make it profitable.

·         You depend on income from the activity for your livelihood.

·         You have personal motives for carrying out the activity such as general enjoyment or relaxation.

·         You have enough income from other sources to fund the activity.

·         Losses are due to circumstances beyond your control or are normal for the startup phase of the business.

·         There is a change to methods of operation to improve profitability.

·         You and your advisor have the knowledge needed to carry out the activity as a successful business.

·         You were successful in making a profit in similar activities in the past.

·         The activity makes a profit in some years and how much profit it makes.

·         You 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.