HOBBY OR FOR-PROFIT ACTIVITY? THE ANSWER MAKES A BIG DIFFERENCE FOR TAX PURPOSES
Article Highlights: Hobby Versus For-Profit Endeavor Factors Used to Determine For-Profit Three out of Five Rule Hobby Deductions Sales from Collections If you are engaged in an activity that produces income , the big tax question is whether the activity is a hobby or a business. The tax treatment of your income or loss from this endeavor hinges on the answer. The tax code (Section 183 – the so-called “hobby loss rule”) limits deductions when an activity is not engaged in for profit, resulting in no loss being deductible for a hobby. A hobby is any activity that a person pursues because they enjoy it and with no intention of making a profit. This differs from operating a business with the intention of making a profit. That being said, it isn’t always clear-cut whether the activity is a hobby or undertaken to make a profit. The IRS has guidelines for determining whether an activity is carried on for profit, such as a business or investment activity, o...