There are activities we engage in outside of work strictly for personal reasons, with no thought of ever profiting from them. You might, for example, enjoy photography, hiking on the weekends, or collecting classic records. There is no monetary gain—and no expectation of making a profit—from these pastimes. You do them simply because you like to do them.
Then there are pastimes we do not consider a job or primary income source but that enable us to earn some additional money. Maybe you took pictures just for fun and posted them to social media. They attracted some attention and now a few people are booking you to photograph their weddings and take professional headshots for them.
Even though you are making money on the side, you may still think of your photography as a hobby, not a business. However, the Internal Revenue Service (IRS) has its own rules for determining whether an activity is a business or a hobby. Understanding these rules can help you take advantage of tax breaks and avoid adverse action by the IRS.
Business versus Hobby: Factors the IRS Considers
The IRS tells us that an activity someone pursues because they enjoy it with no intention of making a profit from it is a hobby. A business is operated to make a profit. How do you distinguish between the two? The factors the IRS considers include:
- Does the time and effort you put into the activity reflect a desire to profit from it?
- Do you regularly keep accurate books and records of the activity?
- Do you depend on income from the activity?
- Were there losses from the activity, and if so, were they beyond your control?
- Have you changed your approach to the activity to increase profitability?
- Do you have the knowledge and skills needed to carry out the activity as a successful business?
- Have you made a profit in the past from similar activities?
- Does the activity make a profit in some years, and if so, how much?
- Can you expect future profit from the appreciation of assets used in the activity?
The IRS notes that the facts and circumstances of the activity must be considered and no one factor is weighted more heavily than the others. An important additional factor is that the IRS presumes an activity is carried on for profit—and is therefore a business—if it made a profit during at least three of the last five tax years.
Tax Implications for Hobby Activities
Whether your activity is a business or a hobby, if it makes any money, you must report the income on your tax return in the year you received the income. Failure to report income violates federal law and could draw the attention of the IRS, especially if the IRS received a form showing somebody else paid you to perform work for them.
Unfortunately, while income from hobby activities must be reported, hobbies do not qualify for tax deductions. Previously you could itemize deductions for necessary expenses associated with a hobby, but that changed with the 2018 tax year because of the Tax Cuts and Jobs Act of 2017, and those new rules continue through 2025.
Reporting Income and Taking Deductions – Or Not
If your activity is considered a business and not a hobby, you may deduct expenses associated with it. Business tax deductions include operating expenses such as home office and office supply costs, work-related travel expenses, phone and internet expenses, legal and professional fees, rent, interest, depreciation, and the costs of advertising and promotion. You can also deduct net losses from the business activity, within certain limits.
The IRS has a long list of rules for business tax deductions. Accuracy is important when writing off business activity in case the IRS decides to have a closer inspection of the deductions you claim. Inaccuracies in your documentation could lead to an audit. For any business expense you claim, document the expense and retain the documentation to provide to the IRS if you are audited.
Not sure if your activity counts as a business or a hobby? Are you ready to start your own business? Not sure where to begin? Planning for the start of your business and its continuation are critical steps in the formation and start of your business. Contact our office at 813-852-6500 to schedule a courtesy discussion to get help with the launch of your new business.