Effective January 1, 2018, hobbies that make a little money are a tax nightmare.
In the past, if you had a loss from your hobbies, you couldn’t take a deduction. That hasn’t changed. Here’s what has changed.
If you made a little bit of money from your hobby, maybe selling some craft item you made or winning a prize for a competition, it didn’t matter tax-wise because your expenses way outweighed the slight income you’d make.
That all changed effective 1/1/2018 when hobby expenses were no longer allowed to be deducted.
That means if you spend $2,000 on your knitting hobby and sell a crocheted shawl for $100, it’s 100% taxable. No deductions.
The solution is to become a business! You don’t want a hobby. You want a business. Here’s a test I developed years ago, in line with the IRS guidelines, to help you determine if you have a business.
The IRS Nine Steps to Business Quiz
Are you operating a business or a hobby? Take this quick test to find out!
Instructions:
- Line one Fill in the name of your company.
- Line two Fill in the type of business your company does.
- Questions Answer the questions with yes or no. Each no answer weakens your position as a business.
Factor One: Businesslike Manner
- Do you have a separate bank account for your business?
Yes ☐ No ☐
- Do you (or your CPA or bookkeeper) keep accounting records
for your business?Yes ☐ No ☐
- Do you keep copies of receipts in a filing system?
Yes ☐ No ☐
- Do you make an effort to collect accounts receivable?
Yes ☐ No ☐
- Do you review profit and loss statements regularly?
Yes ☐ No ☐
Factor Two: Time and Effort
- Do you keep track of time spent in your business activity?
Yes ☐ No ☐
- Do you keep track of business appointments in a schedule or diary?
Yes ☐ No ☐
- Do you have notes of conversations you have had with consultants
or experts to enhance your business?Yes ☐ No ☐
- Do you keep evidence from business seminars that you have attended?
Yes ☐ No ☐
Factor Three: Dependence on Income
- Do you need the income from your business for your lifestyle?
Yes ☐ No ☐
- Do you intend to replace your current job with this business?
Yes ☐ No ☐
Factor Four: Reasonable Losses
If you have losses, do you have documentation that:
- They are normal for the type of business you are in at the beginning?
Yes ☐ No ☐
- Shows that other similar businesses have experienced the same
type of downturn?Yes ☐ No ☐
Factor Five: Effort to Make Money
If you have losses, do you have evidence that:
- You have made changes to try and improve your business?
Yes ☐ No ☐
- You have investigated ways to make your business more profitable?
Yes ☐ No ☐
- You have consulted with experienced business owners
or other advisors regarding your business?Yes ☐ No ☐
Factor Six: Experienced Advisors
- Have you identified the advisors you need for your business?
Yes ☐ No ☐
- Do your advisors have the business experience needed to give you
good advice?Yes ☐ No ☐
Factor Seven: Your Experience
- Have you been successful in this type of business before?
Yes ☐ No ☐
- Have you been successful in a similar business?
Yes ☐ No ☐
Factor Eight: Past Profit
- Has your business been profitable in previous years?
Yes ☐ No ☐
- If your business has been profitable, has the profit been enough
to make a reasonable decision to continue your business?Yes ☐ No ☐
Factor Nine: Asset Appreciation
- Is your business building assets that will have future appreciation?
Yes ☐ No ☐
Scoring the Test
For each of the nine sections above, rate how strong your case is as to business purpose on a scale of
1 to 5, with 5 being the strongest.
| Businesslike manner | 1 | 2 | 3 | 4 | 5 |
| Time and effort | 1 | 2 | 3 | 4 | 5 |
| Dependence on income | 1 | 2 | 3 | 4 | 5 |
| Reasonable losses | 1 | 2 | 3 | 4 | 5 |
| Effort to make money | 1 | 2 | 3 | 4 | 5 |
| Experienced advisors | 1 | 2 | 3 | 4 | 5 |
| Your experience | 1 | 2 | 3 | 4 | 5 |
| Past profit | 1 | 2 | 3 | 4 | 5 |
| Asset appreciation | 1 | 2 | 3 | 4 | 5 |
For your weakest elements, what can you do to strengthen your point score?
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