Hobby Income: Is It Taxable?
September 5th, 2018
All hobby income is taxable. Simply stated, if you make money from a hobby or business, you are required to report it to the IRS. To determine how to appropriately report and classify your income, you must first determine if the IRS considers your hobby a business or not. Some taxpayers think it is best if their hobby income is not considered a business. However, for tax purposes, especially with the New Tax Reform, it is better, if you can consider your hobby a business.
Does the IRS Consider Your Hobby a Business?The IRS defines a hobby for tax purposes as “an activity not engaged in for profit.” If you are taking pictures, playing the cello, making crafts, training horses, or any other number of various activities to make a profit, then the IRS determines, for tax purposes, you are running a for-profit business, not a hobby. You probably are thinking, like many other taxpayers, it is better if I can consider my extra income as a hobby, right? For tax purposes, it is better if your hobby can be considered a business, if you make any income from its operation. If not, you must pay taxes under the New Tax Reform on 100% of your hobby income, regardless of your expenses. Aunt Barbara’s knitting just became even more valuable. If it falls under the IRS guidelines for a business, this means you can deduct your business expenses from yarn to mileage. Many people do activities because they enjoy them and not because they depend on the money they make from these activities. It is in these circumstances that it gets even more complicated to determine whether the IRS considers your hobby a business or not. If you are not sure whether you are engaged in the activity for profit, the IRS lists the following eight (8) factors for taxpayers to consider in helping them make the determination of whether they should consider their extra income as a hobby or business:
- 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?