Determining Whether a Venture is a Hobby or a For Profit Venture

Hobbies

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:

  1. Manner (businesslike or non) in which the taxpayer conducts an activity
  2. Expertise of the individuals conducting the activity
  3. Time and effort expended by the taxpayer
  4. Expectation that assets used in the activity will appreciate in value
  5. Success of the taxpayer in conducting similar/dissimilar activities
  6. History of income/losses with respect to the activity
  7. Amount of occasional profit generated
  8. Financial status of the taxpayer (whether the taxpayer has substantial income from other sources)
  9. 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.

Q&A: What can be included in itemized deductions?

Itemized deductions are made to help reduce the taxpayer's taxable income. Some of the most common types of deductions are for local and state personal property taxes, home mortgage points and mortgage interest. Other common tax deductions include student loan interest, charitable donations, and business expenses. These include the use of a home office, travel expenses, entertainment expenses, and work-related education expenses. Medical and dental expenses may be deducted if they amount to more than 7.5% of your adjusted gross income.

The IRS recommends itemizing your deductions if the amount you qualify for exceeds the standard deduction amount you're eligible for. You can also choose to itemize deductions if you can't use the standard deduction because of applicable IRS rules.

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