Are You Treating Your Business Like a Business or a Hobby?

A hobby is something a person does for enjoyment with no intention of making a profit. Whereas those operating a business have the intention of making a profit. Where does your business stand?

What factors does the IRS consider?

This is a common tax topic when it comes to the IRS and how they designate a business versus a hobby. They have a list of factors that are considered equally, with none being more important than the others.

These factors, quoted from the IRS website include:

• The taxpayer carries out activity in a businesslike manner and maintains complete and accurate books and records.

• The taxpayer puts time and effort into the activity to show they intend to make it profitable.

• The taxpayer depends on income from the activity for their livelihood.

• The taxpayer has personal motives for carrying out the activity such as general enjoyment or relaxation.

• The taxpayer has enough income from other sources to fund the activity.

• Losses are due to circumstances beyond the taxpayer's control or are normal for the startup phase of their type of business.

• There is a change to methods of operation to improve profitability.

• Taxpayer and their advisor have the knowledge needed to carry out the activity as a successful business.

• The taxpayer was successful in making a profit in similar activities in the past.

• Activity makes a profit in some years and how much profit it makes.

• The taxpayer can expect to make a future profit from the appreciation of the assets used in the activity.

Given how close we are to tax time, these are great points to consider when determining whether you will claim your activity as a business or a hobby.

But remember, regardless of which you choose, if you made income, you are required to claim it on your taxes!

Visit the IRS tax tip page to learn more.