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 to help a taxpayer determine if their hobby qualifies as 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 onĀ Schedule 1 (Form 1040), line 8.

Source: IRS