Many people are engaged in hobby activities that are also a source of income. For example, some people started selling masks and other handmade items during the pandemic. These people must report this income on their tax return.
A hobby is any activity that a person pursues because they enjoy it and with no intention of making a profit. This differs from those that operate a business with the intention of making a profit.
Hobby or Business?
In determining whether their activity is a business or hobby, taxpayers must consider these nine factors:
- Is the activity is carried out in a businesslike manner and the taxpayer maintains complete and accurate books and records.
- Does the time and effort the taxpayer puts into the activity show they intend to make it profitable.
- Do they depend on income from the activity for their livelihood?
- Are any losses are due to circumstances beyond the taxpayer’s control or are normal for the startup phase of their type of business.
- Do they change 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.
- Was the taxpayer was successful in making a profit in similar activities in the past.
- Does the activity make a profit in some years and how much profit it makes.
- Whether the taxpayers can expect to make a future profit from the appreciation of the assets used in the activity.
All factors, facts and circumstances with respect to the activity must be considered. And, no one factor is more important than another.
If a taxpayer receives income from an activity that is carried on with no intention of making a profit, they must report the income they receive on Schedule 1, Form 1040, line 8.
Visit the IRS website for more information on taxable vs. nontaxable income, or reach out to your HW&Co. tax advisor.