If you make money doing what you love, isn’t that what we all want in life? But does that make it a business or a hobby business? How can you be sure?
As simple as the difference may seem, the IRS views a hobby as an entity entirely separate from your business endeavors — even if they overlap substantially.
Knowing what separates the two can have major tax implications, so it’s best to educate yourself before you start writing off expenses.
Hobby or business: What does the IRS really care about?
We know you have better things to do than sift through pages of tax law, we’ve sourced this slightly more concise list directly from the IRS. These are the top nine factors the Internal Revenue Service considers when determining the nature and legitimacy of your business (or hobby) when you file your return:
- Do you conduct the activity in a businesslike manner and maintain complete and accurate books and records?
- Does the time and effort you put into the activity indicate you intend to make it profitable ?
- Do you depend on income from the activity for your livelihood?
- Are your losses are due to circumstances beyond your control (or are normal in the startup phase of your type of business)?
- Do you change your methods of operation in an attempt to improve profitability?
- Do you or your advisors have the knowledge needed to carry on the activity as a successful business?
- Were you successful in making a profit in similar activities in the past?
- If the activity makes a profit in some years and how much profit it makes.
- If you can expect to make a future profit from the appreciation of the assets used in the activity.
We get it. All of those questions can seem pretty overwhelming, and that’s okay. Profiting from a hobby is no simple feat, and it can get complex when tax time rolls around — just ask the part-time seamstress whose quilts padded her pocketbook more than she expected last year.
The government is going to get its cut one way or another. But with the help of Morgan & Assocaites CPAs & Advisors we have your back.
If you have a business venture and are concerned about taxes are the implications of hobby or business, please reach out to [email protected] or call us at (616) 776-6457 to set up a consultation with one of our tax professionals.
Note: You can find more detailed information about what qualifies at the IRS’s website.