Quote:
Originally Posted by Gusturd
Interestingly, If you click the "starting a business" link and then click "is it a business or a hobby", I believe the site provides obsolete information. Am I wrong about that?
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Though the article on the IRS site regarding if it is hobby or a business notes that it was written in May of 2017, it is not necessarily obsolete. If you compare it to the Taxslayer article written in January of 2021 that was referenced and also linked to earlier in the thread, you'll note that there are 9 bullet points given to weigh and consider in that Taxslayer article, which just happens to be the exact same number of questions referenced on the IRS site from four years earlier. That isn't a coincidence. The person writing the Taxslayer article just re-wrote what was on the IRS site already, changing wording so it didn't look like a blatant copy job. The IRS site article from 2017 hasn't been changed or updated since it was originally posted because what it says still reflects all the pertinent points and considerations that the IRS and its agents look at when trying to determine if someone has a business or a hobby. The problem is that the answers to all those points/questions aren't always simple yes or no answers.
There's also no definitive measurement, like saying if you answer yes to 5 or more of those points/questions that you are definitely a business, and if 4 or fewer yes answers that you definitely have a hobby. You have to look at and weigh the facts and circumstances for each indivual taxpayer and their unique situation to make the determination of if you have a business, hobby, or investments. It is definitely a subjective question, and not an objective one.
Also, over time as specific facts and circumstances change, you can go from having a hobby to a business, and vice versa. So you must continually review what you are doing as well.
There is one sort of safe harbor the IRS lets you rely upon in determining if you have a business or a hobby, regardless of those 9 points/questionsy they tell you to look at, and that is what is known as the "Hobby Loss Rule". According to this unofficial rule, if you claim some activity is a business and not a hobby and in any 3 out of the last 5 years you reported a net taxable profit from that activity, the IRS will pretty much concede it is a bona fide business for federal income tax purposes.