A hobby is something you do at your leisure. When you make it a business, you must show up for work (e.g., have established operating hours, and dress and act the part). Still, the hobby versus business question boils down to how you handle your expenses and what to do if your activity loses money. For example, let’s say you sell custom gifts and promotion products to the country club crowd – you know, golf, tennis, and swimming enthusiasts – in your spare time. If you actually lose money from this endeavor, when you factor in all the related expenses like sub-contracted goods, materials, and marketing, the IRS will let you deduct this loss to offset your other income (i.e., you regular day job) if your “budding enterprise” is considered a business. You cannot deduct a loss if it’s a hobby.
According to the IRS, an activity is a “business” if it has made a profit in three of the past five years. Until you have five years under your belt, the IRS will look to see if you’re taking the activity seriously and treating it like a business with the primary goal of making a profit.
If you are interested in learning more about how the IRS determines a profit motive for a business, you can go to the IRS website and search for the article “Is your hobby a for-profit endeavor?”
—Your Personal Business Trainer
