Has My Hobby Turned Into a Business?
Recognizing when you need to characterize earned income as coming from a hobby or a business is important when it comes to claiming it on your tax return. Why? Because there is a big difference between a hobby and a for-profit business endeavor in the eyes of the IRS.
How to Determine if Your Hobby is Really a Business (Or the Other Way Around)
Here are some determinations you can make to figure out if your hobby is actually a for-profit activity. You must generally consider these factors to support that your activity is a business engaged in making a profit, according to the IRS:
- Do you conduct the activity in a business-like manner? For example, do you keep thorough books and records to document income and expenses?
- Does the time and effort you put into the activity indicate you intend to make it profitable?
- Do you have sufficient knowledge and skills for this activity?
- Do you depend on the income from the activity?
- Have you changed methods of operation to improve profitability?
- Have you made a profit in similar activities in the past?
- Do you expect to make a profit in the future from an appreciation in the assets used in the activity?
Take into account all facts with respect to the activity. No one factor alone is decisive.
What if Your Activities Classify as a Hobby?
Generally, if the IRS classifies your business as a hobby, you can’t take a net operating loss. But you can deduct expenses against your hobby income. The following write offs may be allowable to the extent of your hobby income, according to the IRS:
- Some non-deductible home expenses, such as insurance and utilities
- Materials and supplies
- Depreciation or amortization of equipment used for the activity
All in all, whether an activity is a hobby or a for-profit endeavor can be a complicated matter. Because of this it is important to consult a professional.
Set up an appointment to determine if your extracurricular activity is a hobby or a business with a Tax Advisors at Block Advisors. Our Advisors have the experience to individuals and small businesses determine important tax implications. Find an Advisor near you now.