In order to have your “hobby” considered a business, you must be pursuing the activity with the intent of making a profit. If this is not the case, the activity will be subject to the IRS hobby loss rules, which provide that such losses are generally deductible only to the extent of income produced by the activity. Furthermore, hobby expenses (only to the extent of hobby income) are deductible as a miscellaneous itemized deduction and are subject to the two-percent-of-adjusted-gross-income floor.

Referencing a recent article in The Tax Adviser, the determination of whether or not your hobby can be classified as a business involves a number of considerations.

• Are you conducting the activity in a businesslike manner and keeping separate books and records?
• Do you have the appropriate knowledge and expertise that would be required to make the business profitable?
• Do you spend substantial time pursuing the activity?
• Even if the activity does not produce a profit currently, is there a reasonable expectation that it can in the future, or that the assets involved will appreciate in value?
• Do you have a long series of losses from the activity that might cast doubt on your intention to eventually make a profit?
• Does the activity involve “personal” motives or provide recreation that may indicate a lack of profit motive?

These and other relevant facts and circumstances must all be considered in determining whether any particular activity is a hobby or a business.

But to end on a positive note, an activity is generally presumed NOT to be a hobby if net profits result in any three of five consecutive tax years ending with the tax year in question.