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Income & Expenses

Question: How do you distinguish between a business and a hobby?

Answer:

In making the distinction between a hobby or business activity, all facts and circumstances with respect to the activity are taken into account.  No one factor alone is decisive.  The most common factors which should normally be considered to establish that the activity is a business engaged in making a profit are the following:

  • Whether you carry on the activity in a businesslike manner.
  • Whether the time and effort you put into the activity indicate 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 change your methods of operation in an attempt to improve profitability.
  • Whether you, or your advisors, have the knowledge needed to carry on the activity as a successful business.
  • Whether you were successful in making a profit in similar activities in the past.
  • Whether the activity makes a profit in some years, and how much profit it makes.
  • Whether you can expect to make a future profit from the appreciation of the assets used in the activity.

Additional information on this topic is available in section 1.183-2 (b) of the Federal Tax Regulations.

Additional Information:


Category: Small Business, Self Employed, Other Business
Subcategory: Income & Expenses

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The OMB number for this study is 1545-1432.
If you have any comments regarding this study, please write to:
IRS, Tax Products Coordinating Committee
SE:W:CAR:MP:T:T:SP
1111 Constitution Avenue NW
Washington, DC 20224