Has your hobby turned into something that you now make money from? Are you unsure whether you should be including it on your tax return?
It’s not unusual for a hobby that you enjoy doing in your free time, to become something that you spend more of your time doing, and that you can make money from, but knowing whether it should be reported as income for tax purposes, isn’t always straightforward. If the activity qualifies as a business, then you may usually deduct ordinary and necessary expenses under section 162 of the IRS Code. If classed as a hobby under section 183 of the IRS Code, deductions are heavily limited and most likely, unavailable.
While a service providing tax preparation in Fort Lauderdale could help you find the answer, sometimes it’s good to know the rules anyway.
What the law says about hobby losses
Deductions for activities you engage in that you don’t earn a profit from, are limited under IRS code section 183, with section 1.183-2 of the Treasury Regulation section providing the IRS with framework that they use to determine if your objective is to make a profit, or not.
It’s worth noting that the IRS evaluate the objective actions of the taxpayer instead of just accepting a statement that making a profit was the taxpayer’s intention.
What happens if an activity is classed as a hobby by the IRS?
Income earned from a hobby is usually taxable for individuals, but any expenses related to that hobby, are typically not deductible due to changes made by the Tax Cuts and Jobs Act in 2025, and which remain under existing law.
This means that taxpayers:
- Pay tax on their income
- Potentially lose deductions for related expenses
- Might owe extra tax, penalties and interest if the activity is reclassified during an examination by the IRS
Should losses be recurring for the taxpayer, the distinction can be of significance in the event of an audit by the IRS.
9 factors used by the IRS to determine if an activity is engaged in for profit
The IRS evaluate circumstances in their totality, rather than focusing on any one single factor:
- Businesslike operations
Are books and records maintained, and does it operate like other businesses in the same industry?
- Expertise
Has the industry been studied before and during the activity?
- Time and effort
Is meaningful time and effort devoted to the activity?
- Asset appreciation
Is an overall profit a reasonable expectation?
- Success in other activities
Is their evidence of unprofitable ventures having been converted into profitable ones?
- History of income or losses
Have losses continued without improvement for an extended period?
- Occasional profits
Have profits been generated, even if only periodically?
- Financial status
Is significant income obtained from other sources that benefits from the losses the activity generates?
- Personal enjoyment
Are significant recreational or personal elements contained within the activity?
How to strengthen your position
If your activity is consistently generating a loss, you can take these steps to try and strengthen your position:
- Keep separate bank accounts for your business
- Maintain complete accounting records
- Prepare budgets and profit projections annually
- Keep evidence of industry research and professional advice
- Regularly review pricing and operations
- Compile a business plan
- Show efforts made to improve profitability
Work with professional accounting in Fort Lauderdale to demonstrate to the IRS that your activity has a profit objective, and isn’t just for personal enjoyment.
Rules around hobbies are used by the IRS to determine if an activity is being carried out with a genuine objective of earning a profit If you maintain accurate and up-to-date records, operate in a manner deemed business-like, and make continued efforts to enhance profitability, you’ll put yourself in a stronger position should your deductions be challenged
