A Business or a Hobby?
Is My Money Losing Activity Really a Hobby?
Many taxpayers try to claim a loss for a personal business, year after year. They need to address basic question about this “losing” activity –is this really a business (job) or a hobby? Here are some basic clues:
Profit? Or loss?
If you make a profit for three out of the last five years, the IRS assumes you’re engaged in an activity to make a profit. If so, you can deduct losses from the activity. However, if an activity isn’t for profit, you can only deduct expenses up to the amount of your hobby income. Expenses more than the income are nondeductible losses.
The 3 out of 5 year rule is a rule of thumb. Here are some other factors:
The IRS considers these factors when deciding if your activity is a business or a hobby:
• Manner that you conduct the activity
• Expertise of you and your advisor
• Time and effort you used to conduct the activity
• Expectation that assets used in the activity might appreciate in value
• Your success in conducting other similar or dissimilar activities
• Your history of income or losses in regard to the activity
• Amount of occasional profits you earned
• Your financial status
• If the activity has elements of personal pleasure or recreation
To learn more about business income and losses, see Publication 334: Tax Guide for Small Business at www.irs.gov.