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  • Dennis C. Carroll, Esq.

When does the IRS consider a business activity a hobby?

Updated: Oct 25, 2023


Generally, a business activity will be considered a hobby when it doesn't look like you intend to make a profit. The IRS will look at the "totality of your circumstances" to see whether you intend to make a profit. Some easy questions to answer are:


Will you starve without the income from this activity?

Are you ending the year with a net loss of income because of conditions beyond your control, like normal startup costs?

Or is your income low (or negative) because you don't want to charge too much?

Have you changed your operations in an attempt to make a profit?

Have you ever made a profit with this activity?


If the IRS considers your business a hobby, then you must report its income on Schedule 1. Reporting the hobby income on Schedule 1 is good because you won't have to pay the, sometimes surprisingly hefty, self-employment tax. But, as of 01/01/2018, you cannot reduce this hobby income with hobby expenses. This is what would be most surprising if the IRS considers your former business as a hobby:


Previously, you used to have a business loss which would lower your income from other sources like retirement or stocks. Now, your other income is not reduced by a business loss and you must add the hobby income to your total income.

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