Editorial Team @ WPR CPA
Side Income: Hobby or Business?
The “COVID Summer” is coming to a close and we at WPR, CPA hope that everyone has stayed healthy and well. Perhaps during this time, you have started a side business or hobby if you found yourself with some extra “down-time”. Below is some information to consider as to whether or not such activity constitutes a hobby or business (in the view of the IRS). We hope you find this information helpful.
Earning side income: Is it a hobby or a business? (Taken from IRS Tax Tip 2020-108)
Whether it's something they've been doing for years or something they just started to make extra money, taxpayers must report income earned from hobbies in 2020 on next year's tax return.
What the difference between a hobby and a business?
A business operates to make a profit. People engage in a hobby for sport or recreation, not to make a profit.
Here are nine things taxpayers must consider when determining if an activity is a hobby or
Whether the activity is carried out in a businesslike manner and the taxpayer 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.
The IRS has many resources to help taxpayers report their income correctly. See the more
information section below for additional guidance.
Publication 334, Tax Guide for Small Business (For Individuals Who Use Schedule C)
WPR, CPA wishes everyone a great end to the summer and continued health and success as we enter the fall season!