Is it a Business or a Hobby?

 Is it Hobby or a Business? 

From collecting
stamps and woodworking to crafting and quilting, people have all kinds of
hobbies, and most of these hobbies never turn a profit.  

For hobbies
that do earn income taxpayers must report it on their tax return as the
government wants to share in the joy of you making a profit from your efforts. 

A business
operates to make a profit while in most cases people enjoying their hobbies are
not necessarily profit motivated.  

People pursue
hobbies for sport or recreation, and not necessarily for profit.  

There are a
number of factors when determining if an endeavor is a hobby
or business.
No single consideration is the deciding factor, but taxpayers should review all
of them when determining whether their activities are a business. 

Here
are the things taxpayers should evaluate to decide whether they have a hobby or
a business: 

• Whether the taxpayer carries out the activity in a
businesslike manner and maintains complete and accurate books and records.


• Whether the time and effort the taxpayer puts into the activity show they
intend to make it profitable.


• Whether they depend on income from the activity for their livelihood.


• Whether any losses are due to circumstances beyond the taxpayer's control or
are normal for the startup phase of their type of business.


• Whether they change methods of operation to improve profitability.


• Whether the taxpayer and their advisors have the knowledge needed to carry
out the activity as a successful business.


• Whether the taxpayer was successful in making a profit in similar activities
in the past.


• Whether the activity makes a profit in some years and how much profit it
makes.


• Whether the taxpayers can expect to make a future profit from the
appreciation of the assets used in the activity. 

If an
activity has had several years of sustained losses the probability is that
there is no profit motive therefore the endeavor would be considered by the
government to be that of a hobby, but should an endeavor start to reach the
level of an enterprise where profits are sustained over a number of years, that
endeavor by definition would be classified as a business which income taxes
would be due and payable.  

Another
determining factor is whether an enterprise has employees which in that case
the enterprise would be definitely considered a business which for payroll tax
purposes all employee taxes would be necessarily be required to be reported and
paid, but that factor may not change a hobby status to that of a business if
losses continue to be sustained.  

Bottom
line, if the bottom line of the enterprise is profitable the government wants
to share in the joy of your enterprise, and then share your wealth with others.
 

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