A guide for hobby businesses
By Mark E. Battersby
THANKS TO TODAY’S tough economy, more and
more people are using their hobbies and other
enjoyable pursuits to generate badly needed income.
Unfortunately, few hobbyists may be aware this
income is taxable.
Under federal income tax laws, any income,
regardless of the source, is taxable. The money earned
from a table built in a garage workshop or a painting
produced by a part-time artist, even a cash prize from
a dog show, can be considered income by the Internal
Revenue Service (IRS) and count when computing
one’s annual tax bill.
However, under U.S. tax rules, income from
these types of activities can be offset or reduced by
related expenses—but only to the extent of the
income from that activity. Thus, a plane owner who
receives money for giving flight lessons can deduct
many of the expenses connected with operating the
plane, but only up to the amount of money received
for those flight lessons.
If a hobby activity is operated as a business,
though, those same tax laws permit even more write-offs and expense deductions to the point where they
can be used to offset wages, savings and investment
income—and the tax bill on that income. And, fortunately, there is more than one way to qualify and
label an activity as a business for tax purposes.
The general rule is that an activity is presumed
not to be just a hobby if profits (more income than
expenses) result in any three of five consecutive tax
years ending with the tax year in question. Without
profitable years, anyone can claim a hobby activity is
a business by demonstrating the intent to show a
profit. For example, an artist or craftsperson might
be working toward realizing profits when he or she
has produced sufficient work for a show or catalog.
Mark E. Battersby covers tax topics for publications
in a variety of fields.
IN ORDER FOR a hobby to
be treated as a business for
income tax purposes, a profit
motive must be present and
some type of economic activity must be conducted.
According to lawmakers,
among the factors that
would ordinarily be taken
into account are:
• The manner in which
the activity is conducted
• The expertise of the
taxpayer or his or her advisers
• The amount of time
and effort expended by
the taxpayer in carrying
out the activity
• The expectation that
assets used in the activity
may appreciate or increase
• The success of the
taxpayer in carrying out
• The activity’s history
of income or losses
• The amount of occasional profits, if any, that
• The financial status of
the taxpayer and whether
losses from a money-losing
activity might substantially
reduce his or her taxable
income from other sources
When it comes to determin-
ing whether an activity is
engaged in for profit, every-
one, including the IRS, must
consider all of the facts and
circumstances. No one factor,
including the fact that the
hobby or activity may be
enjoyable, can be used in
making this determination.
Is your hobby or activity
actually a taxable business?
The IRS’s views can be
search “IRC 183.”—MEB