​Is It a Hobby or a Business?

If you’ve ever taken up a hobby, you probably didn’t do so assuming you were going to make money at it. But sometimes, a hobby can turn profitable. So, it’s important to know where that line is because the IRS treats hobbies and business differently.

Below are some of the differences between the two and a list of questions to ask yourself so you understand how the IRS views what you’re doing.

Usually, a trade or business is something you do for your livelihood or to make a profit. You don’t have to do an activity full-time to have a trade or business. In fact, if you do something part-time, you might be considered self-employed.

A hobby is something you do for pleasure or relaxation. It’s not generally something you do to make money. So, one of the biggest factors distinguishing a business from a hobby is whether you intend to make a profit or do it for fun.

But of course, it can never be that simple. So, if you answer yes to multiple of the following questions, you probably have a business on your hands. And your taxes should reflect that.

• Do you conduct the activity like a business, with accurate books and records?
• Have you changed how you conduct the activity, like doing advertising or promoting it?
• Have you done a lot of studying or asking for expert advice about what you’re doing, including considering your activity’s business or economic practices?
• Is it your main source of income?
• Have you made a profit, or do you expect to?
• Is what you’re doing profitable in some years, or does it always show losses?
• If you’ve had losses, are they outside of your control?

Similarly, if you’re doing something solely for pleasure or recreation, you’ve probably got a hobby on your hands. That said, it’s best to ask a professional, just in case.

If you do have a hobby, you can’t use losses from it to offset other income. But you can deduct expenses up to the amount of income you receive. (Note that the limit on not-for-profit losses applies to individuals, partnerships, estates, trusts, and S corps. It doesn’t apply to C corps.)

Whether you do run a business or pursue a hobby, you should keep good records. If you accept more than $600 for goods and services, you should get a Form 1099-K. The IRS matches these 1099s to your tax returns, and you run the risk of getting IRS notices if they don't see the income reported where they think it should be.

There are lots of other questions to ask yourself when it comes to “business vs. hobby,” so let us help you make the distinction.