In today's episode Paul and I are discussing if you are a business or a hobby. The distinction is not always clear and we break down the differences between the two as well as go into what the IRS says which, let's face it, is the most important thing to consider. There are 9 questions to ask yourself to make the determination and we go through each one! It's not as nerdy as it sounds I promise!
- There is NOTHING wrong with having a hobby! ;-)
- Side hustle doesn't automatically indicate a hobby
Tax implications: If you aren't a business, you can't take business deductions.
Cinnamons personal opinion: If you CHARGE people money for your products or services, you have a business
- Does the time and effort put into the activity indicate an intention to make a profit?
- Do you depend on income from the activity?
- If there are losses, are they due to circumstances beyond your control or did they occur in the start-up phase of the business?
- Have you changed methods of operation to improve profitability?
- Do you have the knowledge needed to carry on the activity as a successful business?
- Have you made a profit in similar activities in the past?
- Does the activity make a profit in some years?
- Do you expect to make a profit in the future from the appreciation of assets used in the activity?
If you answered “yes” a lot, then your activity is more likely a business than a hobby. If you’re still unsure, there’s always the profitability test.
- If you generated a profit in at least three of the last five tax years, including the current tax year, then the IRS considers it a for-profit activity.