It seems like “side hustles” are all the rage these days. But come tax day, the tax treatment of these endeavors can be a big question mark — especially since these often aren’t the primary source of income for those who take part in them.

Hobbies and businesses are treated differently when it comes to filing taxes. The biggest difference between the two is that businesses operate to make a profit while hobbies are for pleasure or recreation.

Whether you are having fun with a hobby or running a business, if you are paid through payment apps for goods and services during the year, you may receive an IRS Form 1099-K for those transactions. These payments are taxable income and must be reported on federal tax returns.

There are a few other things you should consider when deciding whether your project is a hobby or business. No single thing is the deciding factor. All factors need to be taken into consideration and weighed when deciding if your project is a hobby or business.

How to decide if it’s a hobby or business

These questions can help you decide whether you have a hobby or business:

  • Does the time and effort you put into the activity show that you intend to make a profit?
  • Does the activity make a profit in some years, and if so, how much profit does it make?
  • Can you expect to make a future profit from the appreciation of the assets used in the activity?
  • Do you depend on income from the activity for your livelihood?
  • Are any losses due to circumstances beyond your control or are the losses normal for the startup phase of your type of business?
  • Do you change your methods of operation to improve profitability?
  • Do you carry out the activity in a businesslike manner and keep complete and accurate books and records?
  • Do your and your advisors have the knowledge needed to carry out the activity as a successful business?

Whether you have a hobby or run a business, good recordkeeping throughout the year will help when you file taxes. If you need any help determining whether your project is a hobby or a business, please contact our office. We would be happy to help.

This article carries no official authority, and its contents should not be acted upon without professional advice. For more information about this topic, please contact our office.

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