At What Point Does Your Hobby Become a Business?

Woman placing painting of flowers on a table

It is generally accepted that people prefer to make a living doing something they like. A hobby is an activity for which you do not expect to make a profit. If you do not carry on your business or investment activity to make a profit, there is a limit on the deductions you can take.

You must include on your return income from an activity from which you do not expect to make a profit. An example of this type of activity is a hobby or a farm you operate mostly for recreation and pleasure. You cannot use a loss from the activity to offset other income.

Activities you do as a hobby, or mainly for sport or recreation, come under this limit. So does an investment activity intended only to produce tax losses for the investors.

The limit on not-for-profit losses applies to individuals, partnerships, estates trusts, and S corporations. For additional information on these entities, refer to business structures. It does not apply to corporations other than S corporations.

In determining whether you are carrying on an activity for profit, all the facts are taken into account. No one factor alone is decisive. Among the factors to consider are whether:

  • You carry on the activity in a business-like manner
  • The time and effort you put into the activity indicate you intend to make it profitable
  • You depend on income from the activity for your livelihood
  • Your losses are due to circumstances beyond your control (or are normal in the start-up phase of your type of business)
  • You change your methods of operation in an attempt to improve profitability
  • You, or your advisors, have the knowledge needed to carry on the activity as a successful business
  • You were successful in making a profit in similar activities in the past
  • The activity makes a profit in some years and the amount of profit it makes
  • You can expect to make a future profit from the appreciation of the assets used in the activity.

For more information on filing small business taxes, contact J Kelly & Associates.