Do I have a hobby or a business for tax purposes?

April 2nd, 2018

Many people choose to pursue a hobby such as jewelry making, boat racing, coin collecting, baking, photography or showing dogs. A hobby is something you pursue as a sport or for recreation or because you are passionate about it, but not to make a profit. However, you can make money from some hobbies and incur expenses too. Although you must report all income you make from a hobby on your tax return, does that also mean you can deduct the expenses
as business expenses on Schedule C of your tax return? The answer depends on whether the activity is a hobby or a legitimate business, engaged in making a profit. There are several factors to consider in making this determination.

hobby income, Do I have a hobby or a business for tax purposes?

  • Are you carrying on the activity in a businesslike manner and maintaining complete and accurate books and records? Do you have a business plan?
  • 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 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?
  • Have you been successful in making a profit in similar activities in the past?
  • Does the activity make a profit in some years and how much profit does it make? An activity is presumed to be a for-profit business if it produced a profit in at least 3 of the last 5 tax years, including the current year.
  • Do you expect to make a future profit from the appreciation of the assets used in the activity?

hobby income, Do I have a hobby or a business for tax purposes?

If you do not meet the criteria for being a business for profit, you can still deduct some of your hobby expenses but only up to the amount of your hobby income. The expenses must be ordinary and necessary for the activity. If you itemize on your return, the expenses may be taken as deductions on Schedule A.

PLEASE NOTE – Beginning in 2018, Under the Tax Cuts and Jobs Act (TCJA), although you must continue to report income from a hobby, you will no longer be allowed to deduct expenses you incur from that activity.

Need more information or have questions? Our tax planning and preparation professionals are here to help you.