Is it a Business or a Hobby?

It is generally accepted that people prefer to make a living doing something they like. A hobby is an activity for which you do not expect to make a profit. If you do not carry on your business or investment activity to make a profit, there is a limit on the deductions you can take.

You must include on your return income from an activity from which you do not expect to make a profit. An example of this type of activity is a hobby or a farm you operate mostly for recreation and pleasure. You cannot use a loss from the activity to offset other income.

Activities you do as a hobby, or mainly for sport or recreation, come under this limit. So does an investment activity intended only to produce tax losses for the investors.

The limit on not-for-profit losses applies to individuals, partnerships, estates trusts, and S corporations. For additional information on these entities, refer to business structures. It does not apply to corporations other than S corporations.

In determining whether you are carrying on an activity for profit, all the facts are taken into account. No one factor alone is decisive. Among the factors to consider are whether:

  • 1. You carry on the activity in a business-like manner,
  • 2. The time and effort you put into the activity indicate you intend to make it profitable,
  • 3. You depend on income from the activity for your livelihood,
  • 4. Your losses are due to circumstances beyond your control (or are normal in the startup phase of your type of business),
  • 5. You change your methods of operation in an attempt to improve profitability,
  • 6. You, or your advisors, have the knowledge needed to carry on the activity as a successful business,
  • 7. You were successful in making a profit in similar activities in the past,
  • 8. The activity makes a profit in some years and the amount of profit it makes, and
  • 9. You can expect to make a future profit from the appreciation of the assets used in the activity.

  • For details about not-for-profit activities, refer to Publication 535, Business Expenses.