Is it a Business or Hobby?

Is it a business or a Hobby- hands stringing beads

Jewelry making, baking cookies, teaching yoga, freelancer, and social media manager are a few home-based businesses that have become popular over the past few years.

About 50% of all small businesses in the United States are considered home-based. However, that number jumps to 60.1% when looking specifically at companies with no employees. In addition, 69% of startups begin in the home as home-based businesses.

Here’s how to tell the difference between a hobby and a business for tax purposes

A hobby is any activity that an individual pursues because they enjoy it and with no intention of making a profit. People operate a business to make a profit. Many people engage in hobby activities that turn into a source of income. However, deciding if that hobby has grown into a business can be confusing.

Here are some things taxpayers must consider when determining whether their activity is a business or hobby.

  • The taxpayer carries out activity businesslike and maintains complete and accurate books and records.
  • The taxpayer puts time and effort into the activity to show they intend to make it profitable.
  • The taxpayer depends on income from the activity for their livelihood.
  • The taxpayer has personal motives for carrying out the activity, such as general enjoyment or relaxation.
  • The taxpayer has enough income from other sources to fund the activity.
  • Losses are due to circumstances beyond the taxpayer’s control or are typical for the startup phase of their type of business.
  • There is a change in methods of operation to improve profitability.
  • Taxpayer and their advisor have the knowledge needed to carry out the activity as a successful business.
  • The taxpayer successfully made a profit in similar activities in the past.
  • The activity makes a profit in some years and how much profit it makes.
  • The taxpayer can expect to make a future profit from the appreciation of the assets used in the activity.

All factors, facts, and circumstances concerning the activity must be considered. No one factor is more important than another.

Need help determining if your hobby has transitioned into a business or if you are correctly treating your home-based business? Let the professionals at SFS Tax & Accounting help you. Contact us today,

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