Millions of people enjoy hobbies that are also a source of income. From catering to cupcake baking, crafting homemade jewelry to glass blowing — no matter what a person’s passion. Sometimes, however, people try to use hobbies as a means to avoid taxes. For example, they may try to use expenses related to their hobby as a business expense. While you should always seek help from your trusted tax advisor before making any decision regarding your personal or business tax decisions, here are some tips (and warnings) the IRS considers when determining the difference between a business and a hobby.
A hobby is done mainly for recreation or pleasure.
Here are some factors the IRS will consider when determining if an activity is a hobby or business.
- To be a business, you should carry on the activity in a businesslike manner and maintain complete and accurate books and records.
- The time and effort you put into the activity must indicate you intend to make it profitable.
- You depend on income from the activity for your livelihood.
- Your losses are due to circumstances beyond your control (or are normal in the startup phase of your type of business).
- Whether or you change business methods to improve profitability (insead of continue to run the business in way that suggests your goal is to generate losses for tax purposes.
- Whether you or your advisors have the knowledge needed to carry on the activity as a successful business.
- Whether you were successful in making a profit in similar activities in the past.
- Whether the activity makes a profit in some years and how much profit it makes.
- Whether you can expect to make a future profit from the appreciation of the assets used in the activity.
You may find more information on this topic in section 1.183-2 (b) of the Federal Tax Regulations.Additional Information Publication 535, Business ExpensesPublication 17, Your Federal Income Tax for Individuals Category Small Business, Self-Employed, Other Business Sub-Category Income & Expenses