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Tax Saving Tip: Can You Turn Your Hobby into a Business?

Hi, my name’s Greg Reed and I’m the Head of Tax here at SmartBooks. Today I want to talk to you about the hobby versus business rules and how this classification can impact your tax situation.


Change in Tax Legislation Regarding Hobby Expense Deduction

So with the passage of the Tax Cuts and Jobs Act, it made it a lot less desirable to have an income producing hobby. Previously, you used to be able to deduct your expenses from your hobby income and claim net zero. Unfortunately, that was done away with in the TCJA legislation.

Can You Reclassify Your Hobby as a Business?

What you might want to consider is maybe your hobby is an actual business activity, or maybe there are a few things that you can do to tweak the way that you handle it to make it a business activity. The IRS does not care if you have one income or two incomes. However, they do care if you have a legitimate business opportunity.

Nine Criteria From the IRS to Help Make the Hobby vs. Business Classification

In general, the IRS has stated that the primary difference between a hobby and a business is that a hobby is done mainly for recreation or pleasure while a business is pursued for profit. However, since there is a lot of gray area here, the IRS has pulled together 9 questions to help you determine whether your activity is a hobby or a business.

  • Do you carry on the activity in a businesslike manner and maintain complete and accurate books and records?
  • Are you putting in time and effort with the intent to make your activity profitable?
  • Do you depend on the income from the activity for your livelihood?
  • Are your losses due to circumstances beyond your control or are they normal in the startup phase of your type of business?
  • Do you change your methods of operation to try to improve profitability?
  • Do you or your advisors have the knowledge needed to carry on the activity as a successful business?
  • Were you successful in making a profit in a similar activity in the past?
  • Does your activity make a profit in some years? How much profit has it made in past years?
  • Can you expect to make a future profit from the appreciation of assets used in your activity?

If you’d like some help talking through these nine questions to determine whether your hobby can be reclassified as a business, reach out to us. We’re happy to help.

Get started with SmartBooks and learn more about how we can help your small business.