Source: IRS Issue Number: Tax Tip 2023-61
Sometimes the line between having a hobby and running a business can be confusing, but knowing the difference is important because hobbies and businesses are treated differently when it’s time to file a tax return. The biggest difference between the two is that businesses operate to make a profit while hobbies are for pleasure or recreation.
Whether someone is having fun with a hobby or running a business, if they accept more than $600 for goods and services using online marketplaces or payment apps, they could receive a Form 1099-K. Profits from the sale of goods, including personal items, and services is taxable income that must be reported on tax returns.
There are a few other things people should consider when deciding whether their project is a hobby or business. No single thing is the deciding factor. Taxpayers should review all of the factors to make a good decision.
How taxpayers can decide if it’s a hobby or business
These questions can help taxpayers decide whether they have a hobby or business:
- Do they carry out the activity in a businesslike manner and keep complete and accurate books and records?
- Does the time and effort they put into the activity show they intend to make a profit?
- Does the activity make a profit in some years – if so, how much profit does it make?
- Can they expect to make a future profit from the appreciation of the assets used in the activity?
- Do they depend on income from the activity for their livelihood?
- Are any losses due to circumstances beyond their control or are the losses normal for the startup phase of their type of business?
- Do they change their methods of operation to improve profitability?
- Do the taxpayer and their advisors have the knowledge needed to carry out the activity as a successful business?
Whether taxpayers have a hobby or run a business, good record keeping is always key when it’s time to file taxes.
End of IRS Publication
Zaher Fallahi, Tax Controversy Defense Attorney, Tax CPA, assists taxpayers nationwide with their tax preparation, cryptocurrency tax, foreign gifts, undisclosed foreign bank accounts, and other international tax matters. Tel.: (310) 719-1040, (714) 546-4272 and (877) 687-7558 toll free nationwide. Websites: zflegal.com and zfcpa.com E-mail firstname.lastname@example.org