Business or Hobby?

Is it a business or a hobby? If the activity is not engaged in for profit, it is subject to the hobby loss rules, and its deductible expenses are limited to the amount of income it generates, further subject to a threshold of 2% of adjusted gross income (AGI) as a miscellaneous itemized deduction.

There are nine factors the IRS uses for determining whether a taxpayer engages in an activity for profit:

1. How the taxpayer carries on the activity.   Does one strive to sell their service or are they carefree in the results?

2. The taxpayer’s expertise. Is this something the owner knows about, or will take the time to learn the endeavor?

3. The taxpayer’s time and effort in carrying out the activity. Does the tax payer devote time to the endeavor, more than just  a passing interest.

4. An expectation that assets used in an activity, such as land, may appreciate in value. Appreciation may be considered in lieu of current profits.

5. The taxpayer’s success in other activities.  Does the taxpayer make revenue, are they paid?

6. The taxpayer’s history of income or losses from the activity. Track record in the endeavor?

7. The relative amounts of the profits and losses.  Is it a continuous deduction form ones taxes.

8. The taxpayer’s financial status. Is the person dependent on the results?

9. Whether the activity provides recreation or involves “personal motives.” Does one have to devote time and energy in the course of conducting the activity?

The answer to how these factors are evaluated will determine the tax treatment of an activity.