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From stamp collecting and woodworking to crafts and quilting, people have all kinds of hobbies – and most of those hobbies will never pay off. For hobbies that generate income, people should be aware that they must report it on their tax return. They should also be aware that their hobby can be a business.
Determining whether to classify the activity as a hobby or a business can be confusing, but the bottom line is that a business operates to make a profit. People pursue hobbies for sport or recreation, not for profit. There are a few other things people should consider when determining if their project is a hobby or business. No single consideration is the deciding factor, but taxpayers should consider all of them when determining whether their activities constitute a business.
Here are the things taxpayers should assess when deciding whether they have a hobby or a business:
• Whether the taxpayer conducts the business in a professional manner and maintains complete and accurate books and records.
• If the time and effort the taxpayer devotes to the activity shows that he intends to make a profit from it.
• If they depend on the income from the activity for their subsistence.
• Whether the losses are due to circumstances beyond the taxpayer’s control or are normal for the start-up phase of their type of business.
• If they change their operating methods to improve profitability.
• Whether the taxpayer and his advisers have the necessary knowledge to carry out the activity as a successful business.
• Whether the taxpayer has succeeded in making a profit in similar activities in the past.
• Whether the activity generates profits in certain years and how much profit it generates.
• Whether taxpayers can expect to derive future benefit from the appreciation of assets used in the activity.
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