Differentiating Business Losses from Hobby Losses for Greater Tax Savings by Steven Rubin, CPA
Posted on July 24, 2025
by
Steven Rubin
No matter how much income you earn each year, the IRS wants to know. This includes all the earnings you generate from a part-time gig selling products or services, pursuing a hobby or passion project, or as a full-time content creator or social media influencer. However, how the IRS will treat those activities – as a bona fide business or a hobby – can have a significant impact on your total tax liabilities.
The IRS generally assumes that businesses operate to make a profit, whereas hobbies are pursued for individual pleasure or recreation. As a result, satisfying the requirements of a trade or business allows certain tax deductions that are not permitted for hobbies.
More specifically, you may deduct expenses and losses incurred from operating a business to offset or reduce other business income, and, to some extent, your total earned income for the year. Any unused amounts may be carried forward to offset future income in more profitable years. By contrast, hobby expenses were permanently eliminated from the tax code in 2017. Determining whether your activities are categorized as a business entitled to preferential tax treatment requires meticulous record-keeping and effective tax planning. Running afoul of IRS rules can trigger an audit and result in significant penalties.
Qualifying as Business Activities
Earning a profit is not the sole determinant of business activity. The IRS also considers the following factors when deciding whether a taxpayer’s activities are intended for business purposes.
- Do the time and effort the taxpayer puts into the activity indicate an intent to make a profit?
- Have those activities produced a profit in at least three of the past five years, including the current year?
- Does the taxpayer depend on the income generated from the activity for their livelihood?
- Are losses due to circumstances beyond the taxpayer’s control?
- Does the taxpayer change operational activities to improve profitability?
- Do the taxpayer and their advisors have the expertise needed to carry on the activity as a successful business?
- Has the taxpayer made a profit while engaged in similar activities in the past?
- Is the activity carried out like a business with complete and accurate set of books and separate bank accounts?
- Do the taxpayer and their advisors have the knowledge needed to carry out the activities
When the answers to these questions are affirmative, the IRS will assume the taxpayers are conducting a business and allow them to deduct business-related expenses from their total taxable income. It is essential to note that no single factor is more critical than another; however, the IRS will give greater weight to certain aspects over others.
Engaging in Multiple Hobbies
When you engage in two or more hobbies that generate profits during the tax year, you must separate out each activity and the related income unless you can demonstrate that the activities are sufficiently interconnected. One way to make this determination is to provide supporting facts and circumstances that prove that there exists a degree of organizational and economic interrelationship between the various activities.
A Final Word about Payment Processing Apps
Regardless of whether the IRS deems your activities as a business or a hobby, you are required to report and pay taxes on payments received for products or services sold through third-party payment apps such as Venmo, PayPal, Airbnb, Etsy, and eBay. Under the 2025 One Big Beautiful Bill Act (OBBBA), the reporting threshold for payment platforms to issue a Form 1099-K reverted to its previous threshold of $20,000 and 200 transactions during the tax year.
About the Author: Steven Rubin, CPA, is an associate director of Tax Services with Berkowitz Pollack Brant Advisors and CPA, where he provides tax consulting and compliance services to entrepreneurs, high-net-worth families and closely held businesses in a wide range of industries. He can be reached at the CPA firm’s Ft. Lauderdale, Fla., office at (954) 712-7000 or info@bpbpcpa.com.
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