Hobby or Business? Crucial Criteria Explained!

10 Aug 2023 · 1 min

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Donna Genie (YouTube, Aug 10, 2023) explains the IRS checklist used to decide whether an activity is a hobby or a business. She enumerates key factors the IRS considers: recreational intent (whether the activity is done for fun), profit motive (whether there is any way to earn profit), frequency/regularity of the activity (occasional or irregular activity reduces business status), substantial personal enjoyment (leisure/personal pleasure), and lack of formal organization (suggesting forming an LLC or incorporated entity if operating casually).

Chapters

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. First 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. Are they trying to earn profit? Do they have any way possible that they could earn a profit? Next Occasional or irregular activity. So 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.