Whether you pick up painting or cook new concoctions in your kitchen, starting a new hobby is always fun and a great avenue to learn something new. However, there are some important tax considerations when starting a new hobby, especially if you are considering turning your newfound passion into a business.
Taxpayers must report any income earned from hobbies, even if it does not involve a licensed business. While businesses should make a profit, hobbies are primarily recreation. The following nine factors can guide you in determining whether a hobby could also be considered a business, according to the IRS:
- Whether you execute the activity in a businesslike manner and maintain complete and accurate books and records.
- Whether you have personal motives in performing the activity.
- Whether the time and effort you expend in the activity indicate that you intend to make it profitable.
- Whether you depend on income from the activity for your livelihood.
- Whether your losses are due to circumstances beyond your control (or are normal in the startup phase of your type of business).
- Whether you or your financial professional understand how to parlay the activity into a successful business.
- Whether you successfully made a profit through similar activities in the past.
- Whether the activity will make a profit in some years and how much profit it will make.
- Whether you can profit from appreciating the assets used in the activity.
You can also deduct some of the expenses associated with your hobby. Within certain limits, taxpayers can typically deduct ordinary and necessary hobby expenses. An ordinary expense is common and accepted for the activity, while a necessary expense is appropriate.
*This information is not intended to be a substitute for specific, individualized tax advice. We suggest that you discuss your specific tax issues with a qualified tax professional.
Tip adapted from IRS.gov6
Footnotes and Sources
- IRS.gov, November 15, 2023
