Hobby or business?

Taxpayers often wonder if they can deduct expenses related to an activity that is a mixture of both business and pleasure. If an activity is truly a business, you can deduct a net loss, which can offset income from other sources such as wages or investment income. But if an activity is really a hobby, you cannot deduct a net loss. This is a murky area in the tax law, and one that is closely examined by the IRS. Here's a few key points from the information sheet the IRS published this week titled Eight Important Questions for Hobbyists: Summer is a time many Americans take their fishing poles and gardening tools out of storage. Hobbies – such as woodworking, stamp collecting and scrapbooking – are often done for pleasure, but can result in a profit.

Here are eight questions that will help determine if your activity is a hobby or a business.

1. Is the purpose of your activity to make a profit?
2. Do you participate in your activity just for fun?
3. Do you depend on income from the activity?
4. Have you changed methods of operation to improve profitability?
5. Do you have the knowledge needed to carry on the activity as a successful business?
6. Have you made a profit in similar activities in the past?
7. Does the activity make a profit in some years?
8. Do you expect to make a profit in the future from the appreciation of assets used in the activity?