Generally, if someone has a business, they operate the business to make a profit. In contrast, people engage in a hobby for sport or recreation, and not to make a profit.
Taxpayers should consider the following nine factors when determining whether their activity is a business or a hobby and base their determination on all the facts and circumstances of their activity. No one factor alone is decisive, however, and it is important to consider all of these factors when deciding whether an activity is a business engaged in making a profit.
- Whether you carry on the activity in a businesslike manner and maintain complete and accurate books and records.
- Whether the time and effort you put into the activity indicate you intend to make it profitable.
- Whether you depend on income from the activity for your livelihood.
- Whether your losses are due to circumstances beyond your control (or are normal in the startup phase of your type of business).
- Whether you change your methods of operation in an attempt to improve profitability.
- 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.
If a taxpayer receives income for an activity that they don’t carry out to make a profit, the expenses they pay for the activity are considered miscellaneous itemized deductions and cannot be deducted for tax years 2018 through 2025. The taxpayer, however, must still report income they receive on Schedule 1, Form 1040, line 21.
If you have any questions about whether your hobby is actually a business in the eyes of the IRS, don’t hesitate to call.