Your hobby or your for-profit business venture? Sometimes it’s hard to differentiate how the government classifies what you are doing. Roger Russell at Accounting Today spells out the nine specific criteria used by the government to evaluate whether your business is really a business or a hobby. The criteria include: 1) the manner in which the taxpayer carried on the activity; 2) the expertise of the taxpayer or his or her advisors; 3) the time and effort expended by the taxpayer in carrying on the activity; 5) the success of the taxpayer in carrying on other similar or dissimilar activities; 6) the taxpayer’s history of income or loss with respect to the activity; 7) the amount of occasional profits earned; 8)the financial status of the taxpayer and 9) whether elements of personal pleasure or recreation are involved. As Russell states, no single factor is determinative, and more weight may be given to some factors than others.
To read about an actual hobby vs for-profit business dispute that went to the Tax Court, please see this link: https://www.accountingtoday.com/news/racing-enthusiast-lacked-profit-motive-for-car-racing-business