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Is Your Side-Hustle Consider a Hobby or Business for Taxes?

Do I have to pay taxes on my hobby?

Is Your Side-Hustle Consider a Hobby or Business for Taxes?

The Handy Tax Guy No Comment

The Hobby vs Business Test

To help you understand if your activity can be considered a hobby or business, I will provide some rules and guidelines.

Is it a hobby or business? You may have to pay taxes.

In order to make this determination, you should consider the following factors:

  • Does the time and effort you put into your activity indicate an intention to make a profit?
  • Do you depend on income from this activity?
  • Are there losses? Are they due to the circumstances beyond your control or did they occur in the startup phase of the business?
  • Have you changed methods of operation to improve your profitability?
  • Do you or your advisors have the knowledge needed to carry on the activity as a successful business?
  • Have you made a profit in a similar activity in the past?
  • Does it have the ability to make a profit in the next few years?
  • Can you expect to make a profit in the future from the appreciation of assets used in the activity?

Typically, the IRS considers an activity for profit if the business makes a profit at least three of the last five years. This includes the current year and the last two years of the last seven years for the activities where you are actively participating in growing your business.

If you realize a loss happened in the operation of an activity or business, you are allowed to deduct loss from income; however, if the business or activity is considered a hobby, you cannot use a loss to offset income.

Hobby expenses are limited and can be deducted as an Itemized deduction on your tax return.

See IRS publication 535, businesses commences for details on hobby expenses deductions.

We hope this article helped you gain some control of your tax plan this year. Remember not to stress out. Don’t forget to check out The Handy Tax Guy FAQ page for any additional online tax questions.

Be sure to connect via TwitterInstagramFacebookPinterest, or on our Handy Tax Guy contact page.

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All data and information provided on this site is for informational purposes only. The Handy Tax Guy makes no absolute representation to the correctness, mistakes, omissions, delays, appropriateness, or legitimacy of any information on this site. 

**Note: Each client circumstance will vary on a case by case basis**


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