Do You Have a Business or a Hobby?
Distinguishing between a hobby and a business is important because the IRS treats them differently. Factors to consider include the regularity of activities and transactions, income production, ongoing efforts to advance the business, and whether the activity is conducted like a business. For instance, someone who consistently sells handmade crafts on an online platform, keeps accurate financial records, and actively promotes their products is more likely to be classified as running a business rather than pursuing a hobby.
Even part-time endeavors can be considered a trade or business, as long as there is an intention to make a profit. For example, an individual who works a regular job but also operates a small catering service on weekends may be self-employed.
On the other hand, hobbies are pursued for personal enjoyment and relaxation, without the primary goal of making a profit. If someone engages in painting as a leisure activity and occasionally sells a few pieces, it would likely be considered a hobby.
Taxpayers engaged in hobbies cannot use losses from those activities to offset other income. However, they can deduct expenses up to the amount of income generated. For example, if someone collects stamps as a hobby and occasionally sells duplicates, they can deduct expenses related to purchasing new stamps or maintaining their collection.
Regardless of whether it’s a hobby or a business, maintaining detailed records is crucial. Additionally, if a taxpayer receives more than $600 for goods and services, they may receive a Form 1099-K. It is important to report profits from the sale of goods and services, including personal items, on tax returns.