Earning a side income: Is it a hobby or a business?

Whether it’s something you’ve been doing for years or something that you have just started recently to make extra month, the IRS reminds taxpayers that all income earned from hobbies in 2020 must be reported on next year’s tax return.

It is important to understand the difference between a hobby and a business. A business operates to make a profit. Individuals engage in hobby for sport or recreation, not to make a profit.

Here are nine things taxpayers must consider when determining if an activity is a hobby or a business:

  1. Whether the activity is carried out in a businesslike manner and the taxpayer maintains complete and accurate books and records.
  2. Whether the time and effort the taxpayer puts into the activity show they intend to make it profitable.
  3. Whether they depend on income from the activity for their livelihood.
  4. Whether any losses are due to circumstances beyond the taxpayer’s control or are normal for the startup phase of their type of business.
  5. Whether they change methods of operation to improve profitability.
  6. Whether the taxpayer and their advisors have the knowledge needed to carry out the activity as a successful business.
  7. Whether the taxpayer was successful in making a profit in similar activities in the past.
  8. Whether the activity makes a profit in some years and how much profit it makes.
  9. Whether the taxpayers can expect to make a future profit from the appreciation of the assets used in the activity.

If you are unsure if your income should be reported as a hobby or a business, we are here to help. Contact us today for a consultation appointment!

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