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Are You Running a Business or is it a Hobby?

Many people often do activities where they end up making some income from it, such as making jewelry, painting pictures, selling baked goods, etc, but the real question is, is it a business or a hobby? The main reason the IRS is concerned about a hobby versus a business is because you cannot deduct losses if the IRS deems the activity a hobby. A business can write off deductions and take a loss whereas the hobby can only write off expenses up to the profit amount, the deductions cannot exceed the income.

The main feature of a business is that it makes a profit. Hobbies are for recreation and do not turn a profit. Taxpayers can usually deduct ordinary and necessary hobby expenses up to their hobby income. That is because hobby losses cannot be deducted from other income. You also must itemize deductions on a Schedule A in order to deduct the hobby expenses.

The general rule of thumb is that if you have not turned a profit in at least three of the prior five years then the IRS views your business as a hobby.

Please consult your tax advisor on all the above information.

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