US Hobby vs. Business Tax Assessment Aid
Why Classification Matters for Taxes
The IRS distinguishes between an activity carried on for profit (a business) and an activity not engaged in for profit (a hobby). This distinction has significant tax implications:
- Business: You can deduct ordinary and necessary business expenses against your business income. If your business expenses exceed your income, you may have a net operating loss (NOL) that can potentially be used to offset other income or carried to other tax years. Business income and expenses are generally reported on Schedule C (Form 1040) for Sole Proprietors.
- Hobby: You must report all income from a hobby. However, expenses related to a hobby are generally deductible only up to the amount of hobby income. Furthermore, for tax years 2018 through 2025, the Tax Cuts and Jobs Act (TCJA) suspended the deduction for hobby expenses for individuals. This means for these years, you must report hobby income but generally cannot deduct hobby expenses.
Properly classifying your activity is essential for accurate tax reporting.
This tool provides general information on the IRS's factors. It is not a substitute for professional tax advice or a definitive legal determination of your activity's classification.
The IRS considers all facts and circumstances when determining if an activity is a business or a hobby, focusing on whether you engage in the activity to make a profit. Below are the nine factors the IRS typically considers. For each factor, check the box if your activity demonstrates a characteristic that indicates an intent to make a profit.
IRS Assessment Factors:
Checking a box indicates that for that specific factor, your activity shows characteristics of being conducted with a profit motive.
Disclaimer: The IRS Makes the Final Determination.
This tool provides guidance on the factors the IRS considers when distinguishing a hobby from a business. Your self-assessment and the resulting qualitative indication are for informational purposes only and do not constitute a legal determination.
The IRS examines all facts and circumstances of an activity, and no single factor is determinative. The final decision on whether your activity is a hobby or a business rests solely with the IRS.
Maintaining detailed records of income and expenses, and operating your activity in a businesslike manner, are important regardless of classification.
This tool is based on IRS factors for distinguishing a hobby from a business. Consult IRS Publication 334 or a qualified tax professional for detailed guidance.