How to Determine a Business vs Hobby

If you are earning money conducting an activity, you may need to report this on your tax return. In order to determine if you should report this on your tax return, you will first need to find out if you are conducting a business or if you simply have a hobby.

The IRS defines a hobby as something done mainly for recreation or pleasure. The main factor that distinguishes the difference between a hobby and a business is if an activity is engaged in the intention of making a profit.

Here are factors the IRS tells taxpayers to take into consideration to determine whether their activity is a business or a hobby:

• Carrying the activity in a businesslike manner by maintaining complete books and records
• The time and effort into the activity to make it profitable
• Depending on the 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)
• Changing methods of operation to improve profitability
• You or your advisors have the knowledge needed to carry on the activity as a successful business
• If you were successful in making a profit in similar activities in the past
• If the activity makes a profit periodically
• The amount of profit the activity makes
• You can expect to make a future profit from the appreciation of the assets used in the activity

As a reminder, you do not need to actually make a profit to be in a trade or business as long as your goal is to make a profit. You do need, however, to make ongoing efforts to further the interests of your business. It is important to keep records of all income and expenses in the pursuit of making your business profitable.

This entry was posted on Wednesday, November 11th, 2020 at 6:47 pm and is filed under Income. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.