Determining Whether a Venture is a Hobby or a For Profit Venture
The IRS caps deductions associated with hobbies at the income which they produce. For-profit ventures are not subject to this limitation. To help determine if a venture is for-profit or a hobby the IRS has set forth a list of factors. These include:
- Manner (businesslike or non) in which the taxpayer conducts an activity
- Expertise of the individuals conducting the activity
- Time and effort expended by the taxpayer
- Expectation that assets used in the activity will appreciate in value
- Success of the taxpayer in conducting similar/dissimilar activities
- History of income/losses with respect to the activity
- Amount of occasional profit generated
- Financial status of the taxpayer (whether the taxpayer has substantial income from other sources)
- Personal or recreational pleasure to the taxpayer
If gross income from a venture exceeds its deductions, in other words it produces a profit, in at least three out of the last five years (ending with the taxable year), the venture is presumed to be a for-profit. Taxpayers should be mindful of this presumption in their determination.
It is important for taxpayers to be aware of these facts and circumstances when determining if their venture is a hobby or a for-profit business. Hobbies can be very rewarding. That reward, however, does not extend to preferential income tax treatment.