Is it a business or a hobby?

It is generally accepted that people prefer to make a living doing something they like.  A hobby is an activity for which you do not expect to make a profit.  If you do not carry on your business or investment activity to make a profit, there is a limit on the deductions you can take. 

You must include on your return income from an activity from which you do not expect to make a profit.  An example of this type of activity is a hobby or a farm you operate mostly for recreation and pleasure.  You cannot use a loss from the activity to offset other income.  Activities you do as a hobby, or mainly for sport or recreation, come under this limit.  So does an investment activity intended only to produce tax losses for the investors. 

The limit on not-for-profit losses applies to individuals, partnerships, estates trusts, and S corporations.  For additional information on these entities, refer to business structures.   It does not apply to corporations other than S corporations.

In determining whether you are carrying on an activity for profit, all the facts are taken into account.  No one factor alone is decisive.  Among the factors to consider are whether:

• You carry on the activity in a business-like manner,

• The time and effort you put into the activity indicate you intend to make it profitable,

• You depend on income from the activity for your livelihood,

• Your losses are due to circumstances beyond your control (or are normal in the start-up phase of your type of business),

• You change your methods of operation in an attempt to improve profitability,

• You, or your advisors, have the knowledge needed to carry on the activity as a successful business,

• You were successful in making a profit in similar activities in the past,

• The activity makes a profit in some years and the amount of profit it makes, and

• You can expect to make a future profit from the appreciation of the assets used in the activity.