Are you playing your new guitar as a hobby or are you using it to teach lessons in the community?
Most people take up hobbies for personal enjoyment, not to make a profit. Sometimes, however, the line between hobbies and businesses isn’t clear-cut. According to a news release, there are several different factors people should consider when making the determination and the IRS provides resources to help.
The following information is available on IRS.gov to help a taxpayer determine if their hobby qualifies as a business:
- Business Activities
- People should know if their pastime is a hobby or a business
- Earning side income: is it a hobby or a business?
Key Questions to Consider
Is the activity conducted like a business?
- Does the taxpayer maintain complete and accurate books and records?
- Does the taxpayer do the activity in the same way as similar profitable activities?
Does the taxpayer change their methods of operation to improve profitability?
- Does the taxpayer advertise or promote the activity?
- Does the taxpayer work to secure suppliers or products necessary for the activity?
What is the taxpayer’s or their advisors’ expertise in the activity?
- Has the taxpayer, or their advisors, prepared for the activity by extensive study of its accepted business, economic, and scientific practices?
- Does the taxpayer follow the accepted business practices or advice of experts when they pursue the activity?
Is the activity the primary source of income for the taxpayer?
- Does the taxpayer spend much of their time and effort on the activity, particularly if the activity does not have personal or recreational aspects?
- Has the taxpayer pursued the activity full-time or part-time?
- Does the taxpayer employ competent and qualified persons to perform the activity?
Has the taxpayer made or expected to make a profit?
- Has the taxpayer engaged in similar activities in the past and converted them from unprofitable to profitable enterprises?
- Does the taxpayer intend to profit from appreciation in the value of assets, such as land, used in the activity?
Is the activity profitable in some years?
- Does the taxpayer occasionally have a small profit from the activities that are offset by large investments they have made or suffering large losses?
- Has the taxpayer made a substantial profit from the activity?
- Could the activity earn a substantial ultimate profit in a highly speculative venture?
Do any losses from the activity fall beyond the taxpayer’s control or are they normal in the startup phase of their type of business?
- Do the taxpayer’s losses continue beyond the period necessary to bring their activity into profitable status?
- Are the taxpayer’s losses because of things beyond their control, like drought, disease, fire, theft, weather damages, or depressed market conditions?
- Has the taxpayer had a series of years in which they made a profit?
Does the activity have elements of personal pleasure or recreation?
- Does the taxpayer have personal motives for doing an activity, especially where there are recreational or personal elements involved?
- Does the activity lack appeal other than profit?
Claiming Profits and Losses
If taxpayers aren’t trying to make a profit with their hobby, business, or investment activity, they can’t use a loss from the activity to offset other income. The limit on not-for-profit losses applies to individuals, partnerships, estates, trusts, and S corporations. It doesn’t apply to corporations other than S corporations, according to the news release.
If a taxpayer receives income from an activity that is carried on with no intention of making a profit, they must report the income they receive on Schedule 1 (Form 1040), line 8.