Is it a Business or a Hobby?

This question was posed to me this week, and it’s a great one! There are very different treatments for income depending on whether the IRS and taxpayer classify it as a business or a hobby.  So how do you know?

The main thing here is the bigger picture: do you do it to make a profit, or do you do it for fun and just happen to make a couple bucks off it?

To be a business, the IRS wants to see that you make a profit from it for at least three out of five consecutive tax years. (Side note: please don’t believe the viral videos telling you to create a business just to deduct expenses. The loss year over year will put you right in line to be audited.)

Other factors will play into the decision, including your motives, expertise in the field, time you put into it, type of activity and more.

Why does it matter? Income from a sole proprietorship business will go on a Schedule C, where you can deduct expenses but will also be subject to self employment tax.  Income from a hobby will go on your personal return as other income, but you cannot deduct expenses from it, and it will not be subject to self employment tax.

Still need a hand making a decision? Give me a call. I’d be happy to meet to discuss your facts and circumstances!