Is Your Hobby Really A Business?

Is your hobby really a business?  The IRS may think it is. Once people start making money from their hobby, there may be a desire to deduct all of the hobby-related expenses.  If this happens the IRS may become very interested in the nature of the hobby because taxes may be due.

When the hobby generates some income it is generally okay to deduct actual hobby-related expenses up to the annual income the hobby generates.  There are a number of limitations so it is very important to discuss any deductions with a qualified tax professional.

Keep in mind that the IRS will not just take your word that the hobby is/isn’t a business.  Here are some questions to ask yourself:

1. Do you pursue the activity with the goal of making a profit?
2. Have you made a profit in three of the last 5 years?
3. Does your activity involve horse breeding, showing or racing?
4. Do you keep accurate books and separate your hobby and personal finances?
5. Do you spend a significant time conducting your hobby?
6. Does the hobby involve significant personal pleasure or recreation?

As stated before it is very important to speak with a qualified tax professional before determining the status of your hobby as a business.  If it is a business, besides the tax ramifications it may be important to consider protecting yourself by formalizing the business through the establishment of an entity like an LLC. 

Hobbies are a wonderful part of all our lives, and can become even more so as a business opportunity. However, it becomes very important to consider all of the tax and legal ramifications so that your hobby does not turn into your headache. 

Comments

[Jeannie Elliott]

Good tips. Although this is probably not something a family will think about, the distinction between a hobby and a real business is critical when perform economic damage/loss calculations in divorce cases, injury or wrongful death cases as well.

As economists, we deal with these issues a lot when calculating economic losses in those types of cases. Needless to say this is something that attorneys care about alot.

Good post. Keep up the good work.

[Angie Hartford]

Forgive my ignorance, but why the horse-breeding question? The others made a lot of sense to me.