Hobby vs Business

Is it a Hobby or a Business?

In determining whether an activity is a hobby or a business, all facts and circumstances are taken into account. No single factor alone is decisive. The Internal Revenue Service (IRS) reminds taxpayers to follow appropriate guidelines when determining whether an activity is a business or a hobby, an activity not engaged in for profit. Generally, an activity qualifies as a business if it is carried on with the reasonable expectation of earning a profit.

In order to make this determination, taxpayers should consider the following factors:

• Does the time and effort put into the activity indicate an intention to make a profit?
• Does the taxpayer carry on the activity in a businesslike manner, including an intention to a make a profit?
• Does the taxpayer depend on income from the activity for his or her livelihood?
• If there are losses, are they due to circumstances beyond the taxpayer’s control or did they occur in the start-up phase of the business?
• Has the taxpayer changed methods of operation to improve profitability?
• Does the taxpayer or his/her advisors have the knowledge needed to carry on the activity as a successful business?
• Has the taxpayer made a profit in similar activities in the past?
• Does the activity make a profit in some years?
• Can the taxpayer expect to make a profit in the future from the appreciation of assets used in the activity?
• How significant is the element of personal pleasure or recreation in the activity?

The IRS presumes that an activity is carried on for profit if it makes a profit during at least three of the last five tax years, including the current year. If an activity is not for profit, losses from that activity may not be used to offset other income. If an activity is considered a for-profit business, deductions can exceed income, allowing the resulting loss to offset other income.