Solid Solutions to Serious Tax Problems Income Tax Workouts • Responding to Notices
Business and Self-Employment Tax Problems
Free Initial 30 Minute Consultation 952-232-0371 | 877-221-1651
Hurry! Hurry! Hurry! Do Not Delay Responding to a Tax Notice
Learn How i can help

Contact Me

Bold labels are required.

Contact Information
disclaimer.

The use of the Internet or this form for communication with the firm or any individual member of the firm does not establish an attorney-client relationship. Confidential or time-sensitive information should not be sent through this form.

close

Privacy Policy

Why is the distinction between hobby and business important?

It may begin as a hobby. Perhaps a woodworking experiment or brewing gift set began as a fun pastime. But this new pastime has taken off. Perhaps you are spending more and more time on this hobby and you begin to wonder, could this be considered a business?

Why would I want to consider my hobby a business? There is one potential advantage to shifting a hobby into the world of business. Businesses can claim deductions: One of the benefits of having a business is the ability to claim losses for tax purposes. 

So how do I know if I have a business or a hobby? In the eyes of the Internal Revenue Service (IRS), a business generally must have profits that are greater than the claimed deductions for three of five consecutive tax years in order to qualify as a business. Without this, it may be considered a hobby — which would not qualify for the deduction.

There are some exceptions to this generality. The IRS will consider a number of factors if the above is not met. One factor involves a review of the manner the owner operates the business. A piece by CBS News digs into this issue, noting the IRS has looked into whether the taxpayer conducts himself or herself as a business person when working in the scrutinized activity when making its determination.

The agency will also look into the amount of time spent on the activity and the presence of income from other sources. If there is substantial income from another source, the IRS is more likely to consider the activity a hobby used to help make deductions from the primary source of income.

What if I falsely claimed my hobby as a business? Of course, an attempt to claim a hobby as a business can lead to a dispute with the IRS. This is true even if the mistake was unintentional. As a result, those who are wondering if their hobby is truly a business or who have recently received notification from the IRS of a tax dispute are wise to seek legal counsel. 

No Comments

Leave a comment
Comment Information

Privacy Policy | Business Development Solutions by FindLaw, a Thomson Reuters business.