CPA Matt Bryant from the New York State Society of CPA’s discussed the differences between a hobby and a business Monday during News 8 at Sunrise.
Some people will take photos at a wedding or make homemade jewelry, for example. The question is, are these hobbies or business activities?
“There are several factors to consider,” said Bryant. “One of them would be the books or records you keep for the activity. If they are fairly detailed, calculating your exact profit and losses, that could be a business. The time and effort you put into it is another factor. The time to bake a few cakes a year is not that much compared to twenty hours a week making homemade jewelry.”
Bryant said if you do depend on the income, the activity is more than likely to be considered a business, adding if the activity is profitable, it’s more likely to be considered a business. “Typically, the IRS will look back over the last five years, including the current year, and if at least three of those years are profitable, it’s more likely to be a business. The IRS will allow hobby losses up to a certain income, but not a loss itself. In a year where you have more expenses with revenues, you just break even with a hobby.”
Bryant also said if an activity is determined to be a business, then you will report profits when you have them, and you will be able to deduct losses when you have them. “If an activity goes for a couple of years and doesn’t have profits, the IRS may determine it as a hobby, and disallow losses previously claimed as a business.”
Still not sure if you activity is a hobby or a business? Bryant said check in with a trusted CPA. For more information, visit the New York State Society of CPA’s website, click here.