Taxes on Hobby Income vs. Business Income

Hobby Income vs. Business Income

Why the Distinction Matters

• Business: Can deduct all ordinary and necessary business expenses
• Hobby: Income is taxable, but most expenses are NOT deductible (post-TCJA)

IRS Factors to Determine Intent

The IRS uses a "profit motive" test to determine if an activity is a business:

1. You carry on the activity in a businesslike manner
2. Time and effort put into the activity
3. You depend on the income for your livelihood
4. Losses are due to circumstances beyond your control
5. You've changed methods to improve profitability
6. You or your advisors have the knowledge to carry on the activity as a business
7. Activity was profitable in the past
8. You make a profit in some years (safe harbor: 3 of 5 years)
9. You may expect to make a profit in the future from appreciation

Hobby Loss Rules

Prior to 2018, hobby expenses were deductible as miscellaneous itemized deductions. Under TCJA (2018–2025), hobby expenses are not deductible at all, making hobby income fully taxable with no offset.

Making the Transition from Hobby to Business

• Open a separate business bank account
• Keep detailed records and books
• Develop a business plan
• Document time spent on the activity

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Have a side hustle? Let us determine whether it qualifies as a business for tax purposes.