All income must be reported on your tax return, regardless of whether it’s from a hobby or a business. But related expenses (and losses) are deductible only if the activity is a business.
What the IRS Looks At
The IRS distinguishes a hobby from a business based on several factors. It weighs all the facts and circumstances, and no single factor is more important than another.
One factor the IRS considers is whether you conduct the activity in a businesslike manner. This includes maintaining complete and accurate records, tracking income and expenses and taking steps to improve operations. The time and effort you devote is important — especially when they demonstrate an attempt to make the activity profitable rather than purely recreational.
Your financial situation is also considered. If you rely on the activity’s income to support yourself, the activity is more likely to be viewed as a business. If other earnings primarily fund the activity, it may be treated as a hobby. Personal motives, such as pursuing the activity mainly for enjoyment or relaxation, can weigh against business classification.
Profit history and future potential are also key. The IRS considers whether losses you’ve experienced are typical for a start-up (assuming you began the activity relatively recently) or caused by factors outside your control. If so, the IRS may view your activity as a business. Experience and success in similar activities can further support business status. Additionally, the expectation of future profit from the appreciation of assets used in the activity can indicate a business motive.
Tax Treatment of Related Expenses
Historically, taxpayers with hobby income could generally deduct certain related expenses as miscellaneous itemized deductions, subject to a 2% adjusted gross income (AGI) floor. The Tax Cuts and Jobs Act suspended these deductions for tax years 2018 through 2025. The legislation commonly known as the One Big Beautiful Bill Act, signed into law in July of 2025, made that suspension permanent. This means that if the activity is a hobby, you can’t deduct expenses associated with it. However, you must still report all income from your hobby.
If the activity is considered a business, you can deduct related expenses. If the business activity results in a loss, you can deduct the loss from your other income in the same tax year, subject to various limits.
Seek Professional Guidance
The line between a hobby and a business isn’t always clear. If you earn income from a side activity — or are considering turning a passion into a profitable venture — contact the office for help evaluating your situation and understanding the tax implications.
