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Carpenter marking a measurement on a wooden plankDid you know that the IRS doesn’t always let you treat your “business” as a business? They might consider it just a “hobby”! Put simply, a business is an activity you are involved in with the purpose of making money and a hobby is not.

Here are a few easy questions that may help you determine if you have a business or hobby:

  • Do you put in enough time and effort to the activity to show a goal to make a profit?
  • Do you depend on the income from this activity?
  • If you have losses, did they occur in the start-up of the business or are they due to circumstances beyond your control?
  • Have you changed methods of operation to help improve profitability?
  • Do you or your advisors have the information needed to run this activity as a successful business?
  • Have you made a profit in similar activities in the past?
  • Does the activity make a profit in some years?
  • Can you expect to make a profit in the future from the appreciation of assets used in the activity?

If you can answer yes to most of these questions then, you most likely have a business activity and not a hobby. If your activity is considered a hobby, losses from that activity may be used to offset income from the same source only.