A short YouTube video by Donna Genie explaining how the IRS differentiates between hobbies and businesses for tax purposes. The speaker emphasizes that hobby income must be reported but expenses are not deductible, while businesses can deduct ordinary and necessary expenses; she warns that repeated losses may lead the IRS to reclassify an activity as a hobby and mentions an IRS checklist used to make that determination.
If you operate a sole proprietorship and show losses, did you know that the IRS could disallow those? You want to make sure you're in a position to not have the IRS on your back and disallowing your losses. So let's talk a little bit about how hobbies work versus Businesses. First, in those situations where you may have losses for several years, the IRS could construe your business as a hobby instead of a deductible business. So what's the difference between how hobbies are treated versus businesses? Well, hobbies are required to claim all their income, but they can't deduct any expenses against that income. Businesses, however, have to claim their income and can deduct the associated expenses against them as long as they are ordinary and necessary expenses. The IRS has a little checklist that they use whether or not your business qualifies as a hobby or if it's truly a business.
