Tax Tips for Hobbyists
How you can determine if an activity is a business or a hobby.
Most people will never turn a profit from their hobby. However, hobbyists should be aware that if they pursue their hobby to earn income, it may also be a business.
Is the activity a business? The most important thing to know when trying to determine if an activity is a business is:
A business is pursued with continuity and regularity and the primary purpose for engaging in a business is income or profit.
Other things to consider when determining if an activity is business include:
Is the activity conducted in a businesslike manner (business plan, separate bank account)?
How much time and effort does the taxpayer put into the activity?
Does the taxpayer depend on income from the activity for their livelihood?
Are any losses due to circumstances beyond the taxpayer’s control or normal for the start-up phase of their type of business?
Has the taxpayer changed methods of operation to improve the activity’s profitability?
Do the taxpayer and their advisers have the knowledge needed to carry out the activity as a successful business?
Has the taxpayer been successful in making a profit in similar activities in the past?
Does the activity make a profit in some years and how much profit it makes?
Can the taxpayer expect to make a profit from the appreciation of the assets used in the activity?
Is the activity a hobby? Generally, a hobby is an activity that a person pursues because they enjoy it and with no intention of making a profit. However, even if not operated with a profit motive, hobbies can be a source of income.
For tax purposes, anyone who earns income from a hobby must report that income on their tax return. However, unlike business expenses, hobby expenses that would otherwise be allowed are not currently deductible. This is because such expenses are “miscellaneous itemized deductions,” which aren’t allowed through 2025.