When does a hobby become taxable?

Do you have a hobby that pays the bills? During the uncertainty of the last year and a half, many people have turned a hobby into a source of income. If so, that income must be reported on tax returns.

Deductions & Reporting

The extent to which you can deduct expenses related to the activity depends on whether the IRS considers it a business or a hobby. You can generally deduct expenses if you operate as a business with the intent to make a profit. If you receive income from an activity that is carried on with no intention of making a profit, you must report the income received on Schedule 1, Form 1040, line 8.

The IRS looks at 9 factors to determine if an activity is a business rather than just a hobby:

  1. Whether the activity is carried out in a businesslike manner and the taxpayer maintains complete and accurate books and records.
  2. Whether the time and effort the taxpayer puts into the activity show they intend to make it profitable.
  3. Whether they depend on income from the activity for their livelihood.
  4. Whether any losses are due to circumstances beyond the taxpayer’s control or are normal for the startup phase of their type of business.
  5. Whether they change methods of operation to improve profitability.
  6. Whether the taxpayer and their advisors have the knowledge needed to carry out the activity as a successful business.
  7. Whether the taxpayer was successful in making a profit in similar activities in the past.
  8. Whether the activity makes a profit in some years and how much profit it makes.
  9. Whether the taxpayers can expect to make a future profit from the appreciation of the assets used in the activity.

If you are unsure how your hobby would be classified, questions about deductions, or need help meeting reporting requirements, give us a call today.