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Turn Your Hobby into a Business - Tax Rules to Pay Attention to

Many people dream of turning a hobby into a business. And in doing so, you may fail to think of how the IRS will evaluate your new business. So, how do you avoid the IRS calling your business venture a hobby? Let’s take a look.

A hobby, by definition of the IRS, is an activity not engaged in for a profit. Activities engaged in for a hobby are not claimable on your taxes – gains nor losses. So, to claim either, you will need to make sure your venture is a bona fide business.

How to NOT be Deemed a Hobby 

  1. Show a profit in at least three out of five consecutive years.

  2. Run the venture in such a way as to show that you intend to turn it into a profit maker rather than a mere hobby. According to the IRS, hobby loss rules won’t apply if the facts and circumstances show that you have a profit-making objective.

How can you prove you have a profit-making objective? You should operate the venture in a businesslike manner. The IRS and the courts will look at the following factors:

  • How you run your business

  • Your expertise in the area (and your advisors’ expertise)

  • The time and effort you put into your business

  • Whether there’s an expectation that the assets used in the activity will rise in value

  • Your success in carrying on other activities

  • Your history of income or loss in the activity

  • The amount of any occasional profits earned

  • Your financial status

  • Whether your business involves elements of personal pleasure or recreation

Interested in taking that next step? Consult with us to learn how to avoid potential tax issues. Ready to get started? Visit our Business Formation page to get your business started.


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