Is my hobby a business? Profit motive is the key

May 10, 2009|By BOB POOR

Q: My little hobby is starting to make some decent money. How do I tell when I have a business with tax reporting obligations?

A: According to the Internal Revenue Service, an activity generally qualifies as a business if it is carried on with the reasonable expectation of earning a profit.

The profit motive is key in determining whether you have a business or a hobby. Many who have hobbies do so for the enjoyment despite the cost. With a business, the primary objective is to make a profit, and if you don't, you most likely would choose not to continue it.

In general, taxpayers may deduct ordinary and necessary expenses for conducting a trade or business. An ordinary expense is an expense that is common and accepted in the taxpayer's trade or business.


To help you make a determination of between hobby and business, consider the following factors:

· Does the time and effort put into the activity indicate an intention to make a profit?

· Does the taxpayer depend on income from the activity?

· If there are losses, are they due to circumstances beyond your control or did they occur during the startup phase of the business?

· Have you changed methods of operation to improve profitability?

· Do you or your advisers 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?

·Can you expect to make a profit in the future from the appreciation of assets used in the activity?

The IRS presumes that an activity is carried on for profit if it makes a profit during at least three of the last five tax years, including the current year. An exception allows for making a profit at least two of the last seven years for activities that consist primarily of breeding, showing, training or racing horses.

For further information, refer to IRS Publication 535, Business Expenses, or call your tax professional.

Robert A. "Bob" Poor is a local small-business owner/operator. He is chairman of the local SCORE chapter, a small-business counselor and a regular contributor to the Ask SCORE column. Questions may be e-mailed to him at or by mail in care of The Herald-Mail, P.O. Box 439, Hagerstown, MD 21741, ATTN: Ask SCORE column.

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