Is it Really a Business? Or a Hobby?

Some people say they’re in business, but you can’t tell it from the bottom line, or from how often they work at it.  For them it’s more of a hobby, but you can deduct your losses if it’s a business, but if it’s a hobby, you can only deduct losses against actual income, down to zero, but not below.

Here’s how the IRS looks at your business:

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 like a business
    • in a businesslike manner
    • 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.

In other words

  • Do you work at the business?
  • Do you advertise?
  • Do you have revenue coming in?
  • Do you know what you’re doing before you start?

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