NATIONAL (WEHT) – The confusion over the significance of a hobby versus a business is something that happens around tax time. It is not uncommon for people to have a hobby that they can eventually profit from, but sometimes people wonder if that counts as a business.
According to some tax tips provided by the IRS, the IRS has established factors taxpayers must consider when determining whether their activity is a business or hobby.
- The taxpayer carries out activity in a businesslike manner and maintains complete and accurate books and records.
- The taxpayer puts time and effort into the activity to show they intend to make it profitable.
- The taxpayer depends on income from the activity for their livelihood.
- The taxpayer has personal motives for carrying out the activity such as general enjoyment or relaxation.
- The taxpayer has enough income from other sources to fund the activity.
- Losses are due to circumstances beyond the taxpayer’s control or are normal for the startup phase of their type of business.
- There is a change to methods of operation to improve profitability.
- Taxpayer and their advisor have the knowledge needed to carry out the activity as a successful business.
- The taxpayer was successful in making a profit in similar activities in the past.
- Activity makes a profit in some years and how much profit it makes.
- The taxpayer can expect to make a future profit from the appreciation of the assets used in the activity.
The IRS says that 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 on Schedule 1, Form 1040, line 8.