A short advisory video by Donna Genie explaining how the IRS distinguishes hobbies from businesses for tax purposes. It warns sole proprietors that reported losses can be disallowed and enumerates IRS-relevant criteria: recreational intent, lack of profit motive, irregular activity, substantial personal enjoyment, and absence of formal organization; recommends forming an LLC or incorporated entity if operating informally.
If you operate a sole proprietorship and show losses, did you know that the IRS could disallow those? So let's talk a little bit about how hobbies work versus Businesses recreational intent. Is this something you would do just for fun, even if it wasn't part of your taxes and giving you a tax benefit? Next Lack of a profit motive. Do they have any way possible that they could earn a profit? Next Occasional or irregular activity. If you are an artist and you paint two pictures a year, they don't consider that a business because it's not a regular activity. Next Substantial personal enjoyment. Do you derive a lot of pleasure out of this? Is it leisure? Last no formal organization. So if you're operating by the seat of your pants as a sole proprietor, I would suggest that you have a formal entity, an llc, an incorporated entity, or something of that nature.
