The Wall Street Journal has an interesting piece today regarding the distinction between business and hobby losses.
In general, business losses are fully deductible against other income where as hobby losses are not. The rules and application of those rules leaves a lot of murky water around the issue.
How do you determine whether an activity is a hobby or business?
First, Time. How much time do you spend on the activity? If you attend a bass tournament every weekend that could be enough time to justify business expenses against the income.
Second, Pursuit of income. Are you actively pursuing income for the activity. For the example above, if you can show that sought out sponsorships or you maintained a web site or other means of generating income it would go a long way of showing your activity as a business.
Finally, Organization. Do you have your business in an LLC or Corporation entity? Having a definitive business entity with segregated bank accounts and activity goes a long way in proving your activity is a business.
The fact that you enjoy the activity is by no means a test of it being a hobby. A power boat owner recently won a Supreme Court case for business losses even though the owner outright admitted he loved the activity.
These are just a few of the tests that the IRS may use in determining the profit motivation of your activity. Talk to your adviser about your specific activity.
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