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Is Your Self Employed Activity a Hobby or a Business?

Many people often have hobbies where they make some additional income, an example would be an artist who wants to deduct expenses. Both hobby income and business income need to be reported on your tax return but the big difference between the two is whether you can deduct the expenses or not which is why the classification is important.

If the activity is deemed a business then the expenses can get written off on a Schedule C and could possibly produce a loss. If the activity is a hobby then the expenses are a miscellaneous itemized deduction which can no longer be deducted on your return so you gain no benefit from them.

The IRS deems a business one that has the primary purpose of producing income or profit and is engaged with continuity and regularity. Another rule of thumb the IRS uses is that an activity for profit should make a profit in at least three out of the last five years. So if you are claiming losses every year the IRS could deem your activity a hobby. The IRS lists a guideline of nine different factors that can help guide you on the determination of whether you have a business or a hobby:

https://www.irs.gov/faqs/small-business-self-employed-other-business/income-expenses/income-expenses

Please consult your tax advisor on all the above information.

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