Optima Relief Explores how the IRS Determines Your Hobby as a Business

Having a hobby that you’re passionate about allows you to pursue the things you love without having to face any implications. In some cases, if you have a hobby that allows you to earn extra money on the side, the IRS may want you to report it on your next tax return.

Optima Tax Relief explores the difference between a hobby and a business is that people engage in a hobby for recreational purposes and not to earn money versus a business that operates to make a profit.

Here are nine things a taxpayer must consider when determining if an activity is a hobby or a business:

  • If the hobby is carried out in a businesslike manner and the taxpayer keeps books and records of income and expenses they have accrued throughout the tax period.
  • If the time and effort put into an activity becomes profitable enough to support their livelihood.
  • If the taxpayer depends on the income earned from their hobby to support them throughout the tax year.
  • Whether there are losses that are out of the taxpayer’s control that resembles start-up costs for a business.
  • Changes in the methods of operation improve profitability in the hobby causing a taxpayer to receive more income.
  • If a taxpayer or their advisor(s) have the knowledge to create a successful business.
  • If a taxpayer has previously made a profit off of a similar activity.
  • Whether taxpayers can expect to make a future profit off of their hobby.
  • If you have a hobby and are now earning extra cash through sales, this income could possibly be considered additional income and needs to be included on your next tax return.

The IRS has many resources to help taxpayers report their income correctly. See the more information section below for additional guidance.