Hobby or Business? An IRS View.

July 16, 2010

One idea for home business is to turn a hobby into a money-making opportunity. Examples could include crafts, writing or graphic arts.  Naturally there are potential tax implications to consider if one intends to mix business and pleasure.  The following rules and regulations are found on the IRS small business site:

“In order to make this determination (hobby vs business), taxpayers should consider the following factors:

  • Does the time and effort put into the activity indicate an intention to make a profit?
  • Does the taxpayer depend on income from the activity?
  • If there are losses, are they due to circumstances beyond the taxpayer’s control or did they occur in the start-up phase of the business?
  • Has the taxpayer changed methods of operation to improve profitability?
  • Does the taxpayer or his/her advisors have the knowledge needed to carry on the activity as a successful business?
  • Has the taxpayer made a profit in similar activities in the past?
  • Does the activity make a profit in some years?
  • Can the taxpayer expect to make a profit in the future from the appreciation of assets used in the activity?

The IRS presumes that an activity is carried on for profit if it makes a profit during at least three of the last five tax years,including the current year — at least two of the last seven years for activities that consist primarily of breeding, showing, training or racing horses.”

The entire IRS opinion is here: www.irs.gov/newsroom/article/0,,id=169490,00.html


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