Are you running a business or engaging in a hobby? Generally, if someone has a business, they operate the business to make a profit, while hobbyists participate primarily for sport or recreation. Here are three key factors to consider:
- Whether you maintain books and records for your activity.
- Whether the time and effort you put into the activity indicates you intend to make it profitable.
- Whether you depend on income from the activity for your livelihood.
How do you distinguish between a business and a hobby?
In making the distinction between a hobby or business activity, take into account all facts and circumstances with respect to the activity. A hobby activity is done mainly for recreation or pleasure. No one factor alone is decisive. You must generally consider these factors in determining whether an activity is a business engaged in making a profit:
- Whether you carry on the activity in a businesslike manner and maintain complete and accurate books and records.
- Whether the time and effort you put into the activity indicate you intend to make it profitable.
- Whether you depend on income from the activity for your livelihood.
- Whether your losses are due to circumstances beyond your control (or are normal in the startup phase of your type of business).
- Whether you change your methods of operation in an attempt to improve profitability.
- Whether you or your advisors have the knowledge needed to carry on the activity as a successful business.
- Whether you were successful in making a profit in similar activities in the past.
- Whether the activity makes a profit in some years and how much profit it makes.
- Whether you can expect to make a future profit from the appreciation of the assets used in the activity.
You may find more information on this topic in section 1.183-2 (b) of the Federal Tax Regulations.Additional InformationPublication 535, Business ExpensesPublication 17, Your Federal Income Tax for IndividualsCategorySmall Business, Self-Employed, Other BusinessSub-CategoryIncome & Expenses