Here’s how to tell the difference between a hobby and a business

A hobby is any activity that a person pursues because they enjoy it and have no intention of making a profit. People operate a business with the intention of making a profit. Many people engage in hobby activities that turn into a source of income. However, determining if that hobby has grown into a business can be confusing. To help simplify things, the IRS has established factors taxpayers must consider when determining whether their activity is a business or hobby.

These factors are whether:

 

  • You carry out 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 their type of business.
  • There is a change to methods of operation to improve profitability.
  • You 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.
  • 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.

 

All factors, facts, and circumstances with respect to the activity must be considered. No one factor is more important than another.