Do you collect stamps? Write stories? Craft macrame holders for hanging plants? Are these hobbies or actual businesses? The IRS has weighed in on this: "A hobby is any activity that a person pursues because they enjoy it and with no intention of making a profit. People operate a business with the intention of making a profit." Of course, acknowledges the agency, you may engage in hobby activities that turn into a source of income.
However, determining whether that hobby has grown into a business can be confusing. To help simplify things, the IRS has established factors taxpayers must consider when determining whether their activity is a business or a hobby.
These factors are whether:
All factors, facts and circumstances with respect to the activity must be considered. No one factor is more important than another.
In most situations, the IRS will grant a "safe harbor" and approve an activity as a business if it has turned a profit in at least three of five consecutive years.
What if a taxpayer gets lucky and starts making a profit from an activity that was never intended to do so? The IRS has that covered too: If a taxpayer receives income from an activity that is carried on with no intention of making a profit, the taxpayer must report the income he or she receives.
If you're not sure about your situation, consult with a qualified tax professional.
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