You need to know if the IRS will treat your hobby as business
KINGMAN – Kingman is full of talent and initiatives that start as hobbies in the privacy of homes, grow through the social media and change into small businesses. But how do you distinguish between a business and a hobby?
Many people enjoy hobbies that are also a source of income. From painting and pottery to scrapbooking and soap making, these activities can be sources of both fun and finances. Taxpayers who make money from a hobby must report that income on their tax return.
If someone has a business, they operate the business to make a profit. In contrast, people engage in a hobby for sport or recreation, not to make a profit.
Taxpayers should consider nine factors when determining whether their activity is a business or a hobby.
You run a business when you intend to make the activity profitable and when you keep books and records of all operations related to the activity. It is a business if you depend on income from the activity for your livelihood and when you change your methods of operation in an attempt to improve profitability.
The amount of personal pleasure you derive from the activity, your expertise and your overall financial status will also play a role when making the “is it a hobby or business determination.”
If a taxpayer receives income for an activity that they don’t carry out to make a profit, the expenses they pay for the activity are miscellaneous itemized deductions and can no longer be deducted. The taxpayer must still report the income they receive on Schedule 1, Form 1040, line 21.
For more information, visit www.irs.gov.