have one business and two hobbies. I’m not going to discuss hobby number one, as it simply drains money. (Don’t ask me how much my total was for the Amazon order I just placed.) The IRS defines a hobby as “any activity that a person pursues because they enjoy it and with no intention of making a profit.” (Check that box on hobby number one!) And a business is defined as “an activity whose purpose is to make a profit.” That seems to be common sense…but is your business being run as if it’s a hobby rather than a business?
Let’s compare my hobby number two and my business as the IRS would see it:

The taxpayer carries out activity in a businesslike manner and maintains complete and accurate books and records. A businesslike manner means I have and enforce policies, such as terms of service, waivers, pick-up and drop-off rules, task checklists, and so forth. Business, yes. Hobby, no.

Accurate books and records apply to the finances. I have a business plan and do my books weekly for my business. My hobby has a stack of receipts somewhere. I keep them to verify when the credit card bill comes or if I have to return something. But let’s be honest; unused craft supplies never get returned.

The taxpayer puts time and effort into the activity to show they intend to make it profitable. For my business, I schedule and market to clients. I check the pricing of supplies, watch for supply sales and ensure my pricing reflects the cost of doing business, including my salary and vacation, and emergency, retirement and education funds.

For my hobby, I do not care what supplies cost me. I will buy them if I’m in Michaels and they have cute beads. (They always have cute beads.) My only hope is that I’m not losing money when I sell something I’ve made. I have a loose idea of what the supplies cost, and that’s it.

The taxpayer depends on income from the activity for their livelihood. My business pays my bills and allows for hobbies…even the one that bleeds money. I’m able to fund how I want to live. I’d live in a cardboard box if I depended on the income from my hobby.

The taxpayer has personal motives for carrying out the activity, such as general enjoyment or relaxation. Personal motives can apply to both business and hobby. But running your business profitably and with sound policies and procedures will help keep it enjoyable. There is never a question of my hobby being anything but fun.

The taxpayer has enough income from other sources to fund the activity. I don’t need to make a living from a hobby. If I did, it would change the dynamic. I’d have to look for the best prices on supplies, and I’d have to make A LOT of product. Plus, it would take the fun out of it.

Losses are due to circumstances beyond the taxpayer’s control or are standard for the startup phase of their type of business. The intention is always there; you need the business to make enough money to support you. However, things out of the ordinary, such as disasters or pandemics, are not an accurate measure of whether or not your business makes enough to take it out of business and put it into the hobby category.

There is a change to methods of operation to improve profitability. For my business, I am always looking for ways to streamline processes, improve organization and determine whether the current technology I’m using is sufficient, or if there are better options available. The only method that applies to my hobby is whether or not to order online or make a second trip that day to Michael’s.

Taxpayer and their advisor have the knowledge needed to carry out the activity as a successful business. I have a CPA who advises me on the best way to run my business. He couldn’t care less about the implications of a hobby, nor would I pay him for such advice.

The taxpayer successfully made a profit in similar activities in the past. To be clear, I have never made any appreciable income in my crafting. But, I have demonstrated profitability in previous years and past businesses.

The taxpayer can expect to profit from the appreciation of the assets used in the business activity. I can sell off business equipment or use that equipment to make money. Hobby-wise, I have bins of crafting material which may bring a very small sum at a craft swap, but I would certainly not consider it an asset.

It’s not just one of these criteria that determine whether or not you’re running a business or a hobby. Look at each of these statements as an exercise to determine how your business is being run, and if it’s sounding more like a hobby, it’s time to re-evaluate and make those necessary adjustments.

Treating my business as a business feeds my life. It puts food on the table, plans for my retirement, pays my bills, allows me to take a vacation and funds my hobbies. My hobbies feed my soul. (And, by the way, I still have to report that income if I make any money off of my hobby). Don’t treat your business as a glorified hobby.