Is it a Hobby or a Business? How the IRS Decides

How does the IRS determine whether your small business is a hobby or a legitimate business? They examine the following factors:

▪ Has this shown a profit in at least three out of five consecutive years? And are you running it in such a way to earn a profit in the future?

▪ How you run your operations. Do you run it more like a business with records and proper books? Or is run more like a hobby?

▪ Your expertise in the field. Do you need a license to operate, or is it something you can do without specific training, a degree, or the need to follow regulations?

▪ The history of income or loss in the activity. How long have you been operating, and has your operation ever made a profit?

If deemed a hobby under the so-called "hobby loss" rules, you’ll only be able to claim deductions up to the amount of the income generated by that activity.

However, if the activity isn’t affected by the hobby loss rule, all otherwise allowable expenses would be deductible on Schedule C, even if they exceeded income from the enterprise.