We know that sometimes determining whether an activity should be classified as a hobby or a business can be confusing, but the bottom line is that a business operates to make a profit. There are a few other considerations when determining if a project is a hobby or business. No single point is a deciding factor, but taxpayers should review all of them when determining whether their activities are a business.
Here are the things taxpayers should evaluate to decide whether they have a hobby or a business:
• Whether the taxpayer carries out the activity in a businesslike manner and maintains complete and accurate books and records.
• Whether the time and effort the taxpayer puts into the activity show they intend to make it profitable.
• Whether they depend on income from the activity for their livelihood.
• Whether any losses are due to circumstances beyond the taxpayer's control or are normal for the startup phase of their type of business.
• Whether they change methods of operation to improve profitability.
• Whether the taxpayer and their advisors have the knowledge needed to carry out the activity as a successful business.
• Whether the taxpayer was successful in making a profit in similar activities in the past.
• Whether the activity makes a profit in some years and how much profit it makes.
• Whether the taxpayers can expect to make a future profit from the appreciation of the assets used in the activity.
What is the tax consequence of having hobby income?
If you have income from a hobby, you are not able to deduct any expenses for the hobby on your federal tax return. This is due to the elimination of miscellaneous itemized deductions for 2018-2025. As a standard rule unrelated to the 2018-2025 tax law changes, you may not claim hobby expenses that exceed the hobby income in a given tax year, and these expenses would only affect taxpayers who itemize.
If you would like to discuss this further with a member of our Team, please schedule a consultation using this link: https://calendly.com/karasseipeltax