Hobby vs Business Activity

Differences between a Hobby and Business Activities

The nine factors listed below have been developed by the Internal Revenue Service (IRS) to determine if the activity you perform is a hobby or a business. The determination of a hobby or a business with respect to tax returns have completely different tax rules and guidelines.

How Do You Distinguish between a Business and a Hobby?

In making the distinction between a hobby or business activity, take into account all facts and circumstances with respect to the activity. No one factor alone is decisive. You must generally consider these factors in determining whether an activity is a business engaged in making a profit.

1. Whether you carry on the activity in a businesslike manner and maintain separate and accurate books and records for your personal and business activities.

2. Whether the time and effort you put into the activity indicate your intent to make it profitable.

3. Whether you depend on income from the activity for your livelihood.

4. Whether your losses are due to circumstances beyond your control (or are normal in the startup phase of your type of business).

5. Whether you change your methods of operation in an attempt to improve profitability.

6. Whether you or your advisors have the knowledge needed to carry on the activity as a successful business.

7. Whether you were successful in making a profit in similar activities in the past.

8. Whether the activity makes a profit in some years and how much profit it makes.

9. Whether you can expect to make a future profit from the appreciation of the assets used in the activity.

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RMH Tax & Financial Advisors, Inc.

12805 Highway 55, Suite 412,
Plymouth, MN 55441
T: (763) 557-2818
E: bobh@rmhtax.com

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