Official Warning: Are you running a business? Or having fun with a hobby?

by Tracey Hrica Mar 04, 2023 | Share

This is not a joke! Here’s what to do if the IRS could consider your business a hobby.

I’ll admit it; I’m not very “fun.” 

I’m really kind of boring – my favorite thing to do is read. All of the time – any spare moment I get!

And, I’ve often wished I could somehow read for a living.  

That would be my dream job.  

I’ve gone as far as listing the possible ways to earn money by reading:

Book reviews?

Creating home school curriculum?

Writing essays or cliff notes for lazy college or high school kids? Just kidding…

But, not only would I be living my perfect life, I could “write off” the books I buy…and there are A LOT.

But then, I come back to reality.

The IRS has strict rules for determining the difference between a business and a hobby for tax purposes.  

Therefore, while expenses incurred to conduct a business are deductible, expenses incurred for a hobby may not be, causing your taxes to increase. 

A person that conducts an activity for profit can deduct the expenses that are ordinary and necessary in that industry. If the expenses exceed the income, a loss is incurred. This loss can offset other income, such as wages, interest, or dividends. 

However, if your activity is determined to be a hobby for IRS purposes, you cannot reduce your wages, interest, or dividends by any losses. 

When you have losses for three years in a row, you must be able to prove to the IRS that your activity is truly a business and not a hobby.  

The IRS will consider the following when evaluating your business/hobby: 

  • The manner in which you carry on the activity
  • The expertise of the taxpayer in this industry as well as the taxpayer’s history and success in this industry
  • The time and effort spent in the activity and whether the taxpayer depends on the income for their livelihood
  • The elements of personal pleasure or recreation

Even if you have losses, there is a lot you can do to ensure your business is not considered a hobby. Here are some ideas to implement.  

  1. Develop a written business plan and update it annually. Show how you plan to convert your losses into gains. 
  2. Set up a separate business bank account and credit card account(s), and use them only for business purposes.  
  3. Keep thorough and professional books.
  4. Obtain insurance, registrations, certifications, and licenses needed for that type of industry.
  5. Maintain a second phone listing for the business.
  6. Keep a detailed calendar of your business activities. Record time spent on your business. 
  7. Document evaluations of your operation to attempt to improve the business’s profitability.
  8. Research trends in similar businesses.
  9. Log any personal use on assets, such as a camera or automobile.

If there’s any question that your activities could be considered a hobby, these tips will help you stay proactive for tax purposes.  

About the Author

Tracey Hrica

Tracey Hrica joined the firm in 1995 as a bookkeeper. In 2012, she earned the designation of Enrolled Agent(EA), which enables her to prepare personal and business tax returns and represent clients before the IRS. To maintain the designation of EA, she must complete yearly continuing education in the areas of personal and business taxation. Working closely with her clients, Tracey’s primary areas of concentration are new client onboarding, client communication, research, and QuickBooks support. As a QuickBooks ProAdvisor, she works closely with clients who rely on QuickBooks for the day to day running of their business. Tracey has expertise in both QuickBooks Desktop and QuickBooks Online.

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