Whether it’s something you have been doing for years or something you just started to make extra money, you must report income earned from hobbies in 2020 on next year’s tax return.
What the difference between a hobby and a business? A business operates to make a profit. People engage in a hobby for sport or recreation, not to make a profit.
Here are nine things you must consider when determining if an activity is a hobby or business:
- Whether the activity is carried out in a businesslike manner and you maintain complete and accurate books and records.
- Whether the time and effort the you put into the activity show you intend to make it profitable.
- Whether you depend on income from the activity for your livelihood.
- Whether any losses are due to circumstances beyond your control or are normal for the startup phase of your type of business.
- Whether you change methods of operation to improve profitability.
- Whether you and your advisors have the knowledge needed to carry out the activity as a successful business.
- Whether you are 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 you can expect to make a future profit from the appreciation of the assets used in the activity.