You’re a tax professional, so I don’t need to tell you that whether your client thinks his hobby is just a hobby or a business does not matter. What matters is what the IRS says!
We understand that you know how the IRS makes these determinations, so we made a handout for you to share with your clients to help them understand what goes into the determination. You will find that hand out HERE. Feel free to send the link to your clients, add your own comments and contact information to the document, but we do ask that you leave our logo and information on the piece.
In case you need a quick refresher, here’s what the IRS says are the determining factors in whether it is a Business or a Hobby.
- 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.
You can download the hand out HERE.