Distinguishing between a hobby versus a business for tax purposes

Distinguishing between a hobby versus a business for tax purposes

Several factors and circumstances help determine if an activity producing a net operating loss should be treated as a business or hobby for tax filing purposes. In general, a hobby is mainly done for recreation and pleasure whereas a business is primarily focused on generating a profit. Of the factors outlined below, take all into consideration as no single item is decisive:

  • Can you expect to make a future profits from the appreciation of the assets used in the activity?
  • Do you plan to change your operational methodology with the intent of improving profitability?
  • Do you depend on the income from the activity to support your livelihood?
  • Have you been successful in making a profit from similar activities?
  • Are losses due to circumstances which are out of your control or are they normal in the initial start-up phase for your type of business?
  • Whether the activity makes a profit in some years and how much profit it actually makes.
  • Does the time and effort involved show your intend to make it profitable?
  • Is the activity conducted in a businesslike manner with a full set of bookkeeping records?
  • Do you have the knowledge needed to carry on the activity as a successful business?

If you need more information or insight on this topic, contact us. Millan & Company, P.C. is a full service CPA firm in Austin, Texas. We have seven degreed accountants, and four of them are professionally designated CPAs with over forty years of combined business experience. We participate in the Texas State Board of Public Accountancy’s Peer Review program, which is dedicated to enhancing the quality of accounting, auditing and attestation services performed by Texas CPAs in public practice.

Millan & Company focuses on client satisfaction and the delivery of beneficial services at the highest level of quality. Our size allows us to keep overhead low and consequently the fees charged are very competitive. Contact us today to learn how we can work with you.

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