Here are eight questions that will help determine if your activity is a hobby or a business:
- Is the purpose of your activity to make a profit? Generally, your activity is considered a business if you expect to earn a profit.
- Do you participate in your activity just for fun? Hobbies, also called not-for-profit activities, are those activities that are not pursued for profit.
- Do you depend on income from the activity? If so, your activity is likely considered a business.
- Have you changed methods of operation to improve profitability? If so, your hobby may actually be a business.
- Do you have the knowledge you need to turn your activity into a successful business? People who carry out hobbies just for fun often don’t have the business acumen to turn their not-for-profit activity into a profitable business venture.
- Have you made a profit in similar activities in the past? This may mean your activity is a business instead of a not-for-profit hobby. An activity carries a profit if it makes a profit in at least three of the last five tax years, including the current year—or at least two of the last seven years for activities that consist primarily of breeding, showing, training or racing horses.
- Does the activity make a profit in some years? Even if your activity does not make a profit every year, it still may be considered a business.
- Do you expect to make a profit in the future from the appreciation of assets used in the activity? This indicates your activity may be a business rather than a hobby.
If your activity is not carried on for profit, allowable deductions cannot exceed the gross receipts for the activity. If you are conducting a trade or business you may deduct your ordinary and necessary expenses.
More information about not-for-profit activities is available in Publication 535, Business Expenses, available on the IRS website or by calling 800-TAX-FORM (800-829-3676).
