Both the federal government and Oregon have guidelines for determining the differences between a business and a hobby. The classification of your income-earning activity affects which tax form you should fill out and whether you can take certain deductions.
Not for profit
Federal business law states that an activity done for profit is a business. If you’re not doing it for profit, then it’s most likely a hobby or a charity.
Nine factors test
The IRS uses a nine factors test to assess whether an activity is a business or a hobby. One of the factors is depending on the income for your livelihood. The IRS is likely to perceive your income source as a business if you rely on it to cover your living expenses.
Other aspects of the nine factors test include business records, customer acquisition, advisors and employees and profits and losses. If you are hiring people, then it’s most likely a business. However, you don’t need to hire an advisor or employee for your activity to qualify as a business.
Types of income
Because some types of income are more likely to be hobbies, the IRS may take a closer look at your situation to determine if it’s a hobby or business. This includes writing, photography, craft sales, fishing, horse racing and dog breeding.
No hobby deduction
Up until 2018, the federal government allowed tax deductions for hobby expenses. The 2017 Tax Cuts and Jobs Act eliminated this deduction. You can only take deductions if your activity is a business.
When it comes to an activity that generates money for you, intent plays a major role in whether it’s a business or a hobby. If you rely on the income for your livelihood, then it’s most likely a business.