900 N. Kings Highway, Cherry Hill, New Jersey 08034
856.667.4100 ·
215.563.0276 ·
Fax: 856.667.3652
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Business Tip |
If you have a hobby that takes up a lot of time and money, take a close
look to see if it qualifies as a business. Why? Having a business instead of a hobby could mean a lower tax bill.
If your activities constitute a business, then your expenses, including depreciation, may be tax deductible. As
a hobby, these expenses are subject to limitations. Business losses are tax deductible and can be used to offset
other taxable income. Hobby losses cannot.
The IRS defines a hobby as an activity not engaged in for profit. Here are some of the determining factors.
Look at your history.
If your activity shows a profit in three of the most recent five years (two out of seven years for horse-related
activities), it is more likely a business than a hobby.
Examine your conduct.
Even if your business loses money, you may be able to deduct the losses if you can show that you were engaged in
this activity with the intent of making a profit.
Keep good books.
You must keep accurate books and records, and conduct the activity as a business. If your recordkeeping is haphazard,
it will probably be difficult for you to demonstrate that your activity was a business rather than a hobby.
Watch the clock.
Document the time you invest in this activity. The amount of time you spend in relation to other activities will,
in part, determine whether this activity qualifies as a business.
Experience counts.
Past experience with similar activities, especially if they were profitable, may be an indicator that this activity
is more than a hobby.
Fun is bad.
If the activity has elements of personal pleasure or recreation, it may be more heavily scrutinized by the IRS.
If you hope to deduct any losses resulting from a sideline business, be certain that you are doing all that is
necessary to meet the requirements of running the activity in a business-like manner. Call us if you would like
more information.
