Who knew your love of pets would turn into a business? You started pet sitting a few times to help out friends and family who did not want to board their pups. Suddenly, you find yourself being asked to pet sit every weekend, and everyone wants to pay for the service. What started out as a way to keep pets in their own home and to spend time loving on them has gone from a hobby to a business!

Once people start making money from their hobbies, they frequently start to deduct all of their hobby-related expenses. At this point, the IRS can become very interested in the nature of the taxpayer’s hobby/business. There are certain tax guidelines to keep in mind.

Deducting Expenses

If the IRS deems your activity a hobby, you cannot use those losses to offset other income. Previously, with a hobby, your expenses could only offset the revenue associated with that activity. In 2017, when the Tax Cuts and Jobs Act was passed into legislation, taxpayers could no longer deduct any expenses deemed to be a hobby. However, they still need to report any income associated with that hobby.

These restrictions don’t apply to business expenses. If you operate an active business, your business-related expenses generally will be deductible, even if they exceed your business income (limitations apply).

Passing the Test

The IRS won’t just take your word for it. It has a set of guidelines to determine whether a hobby qualifies as a business. First and foremost, you must be pursuing the activity with the goal of making a profit. If you’ve made a profit in three of the last five years (two of the last seven years for activities that consist primarily of breeding, showing, training, or racing horses), the IRS assumes you had a profit motive.

If you don’t meet the profit criteria, here are a few of the other questions the IRS may ask:

  • Do you keep accurate books and records and separate your business finances from your personal finances?
  • Do you spend significant time and effort carrying out the business?
  • Does the activity involve a significant element of personal pleasure or recreation?

Contact the professionals at Gilliam Bell Moser, LLP today for additional information on IRS hobby-loss rules.