The Internal Revenue Service reminds taxpayers to follow appropriate guidelines when determining whether an activity is a business or a hobby, an activity not engaged in for profit.

In order to make this determination, taxpayers should consider the following factors:

    – Does the time and effort put into the activity indicate an intention to make a profit?

    – Does the taxpayer depend on income from the activity?

    – If there are losses, are they due to circumstances beyond the taxpayer’s control or did they occur in the start-up phase of the business?

    – Has the taxpayer changed methods of operation to improve profitability?

    – Does the taxpayer or his/her advisors have the knowledge needed to carry on the activity as a successful business?

    – Has the taxpayer made a profit in similar activities in the past?

    – Does the activity make a profit in some years?

    – Can the taxpayer expect to make a profit in the future from the appreciation of assets used in the activity?

The IRS presumes that an activity is carried on for profit if it makes a profit during at least three of the last five tax years, including the current year – at least two of the last seven years for activities that consist primarily of breeding, showing, training or racing horses.

Photo by IRS.