Do you have a hobby or a business? The IRS will want to know...

From gardening to crafting and all things in between, people pursue a wide array of hobbies which are unlikely to generate income. However, for those hobbies that do earn money, individuals need to understand their obligation to report it on their tax returns. Moreover, they should be aware that their hobby might meet the criteria for being considered a business.

Determining whether an activity should be classified as a hobby or a business can be confusing. Ultimately, the key distinction is that a business is operated to make a profit. There are several factors individuals should consider when making this determination. While no single factor alone determines the classification, taxpayers should carefully assess all relevant factors to determine if their activities qualify as a business.

Here are the key considerations taxpayers should evaluate to determine whether their endeavor is a hobby or a business:

1. Whether the taxpayer conducts the activity in a businesslike manner and maintains thorough and accurate financial records.
2. Whether the time and effort invested in the activity indicate an intention to make it profitable.
3. Whether the taxpayer relies on income from the activity for their livelihood.
4. Whether any losses incurred are typical for a startup phase or are beyond the taxpayer's control.
5. Whether adjustments are made to improve profitability.
6. Whether the taxpayer and their advisors possess the necessary knowledge to operate the activity successfully.
7. Whether the taxpayer has a history of making a profit in similar activities.
8. Whether the activity has generated profits in some years and the magnitude of those profits.
9. Whether there is an expectation of future profit from the appreciation of assets used in the activity.

Considering these factors comprehensively will help taxpayers determine whether their pursuit is classified as a hobby or a business under tax regulations.  If you'd like help determining if your hobby has become a business for IRS tax reporting purposes, please contact a ShindelRock tax professional.