You may make jewelry, sell baked goods, or do some carpentry. When you start selling these goods, the IRS may need for you to report this income. So, how do you know when it remains a hobby or becomes a business? When your hobby becomes profitable, it may be a business. The IRS offers some factors for you to consider, including:
• Do you carry on the activity in a businesslike manner and maintain books and records?
• Does the time and effort you put into the activity indicate you intend to make it profitable?
• Do you depend on income from the activity for your livelihood?
• Are your losses due to circumstances beyond your control (or are normal in the startup phase)?
• Have you changed your methods of operation in an attempt to improve profitability?
• Do you or your advisors have the knowledge needed to carry on the activity as a successful business?
• Were you successful in making a profit in similar activities in the past?
*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.gov