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These 9 questions will help you determine the answer.

These questions cover the factors that the IRS recommends that you consider when classifying your activity. Try to look at what you do objectively and answer each question with honesty.

Answering “yes” most of these questions will indicate that you likely have a business. Answering “no” suggests that you are a hobbyist.

Now the caveat: the IRS will take all facts and circumstances into account. No single aspect can make the determination, and this list is not all-inclusive. So this is indicative, but the IRS will make the final decision.

On to the questions…

1. Do you carry on the activity in a business-like manner?

Some sub-questions to help you define this are:

• Do you maintain complete and accurate books and records? (As a hobbyist, you must keep track of your earnings, so keeping track does not necessarily mean that you are a business. But if you want to show the IRS that you are operating a business, then keeping your books and records is very important).
• Do you operate in a very similar way to profitable activities of a similar nature?
• Do you change working methods and techniques to improve profitability?

2. Are you or your advisors experts in the field?

Having and using expertise suggests a level of knowledge that implies that you are running a business. So the key questions are:

• Are you knowledgeable or in consultation with those who are knowledgeable about a particular industry
• Do you use that knowledge to try to make a profit?

3. Do you expend a lot of time and effort?

The more effort you invest, the more your activity looks like a business.

Do you take away time from another occupation to do this work (if you reduce the time you spend on other employment or ventures, this indicates you see this as a business)?
Do you have employees (having employees is a pretty clear indicator that you are operating a business?

4. Do you expect that assets used in the activity may appreciate?

Even if you make no profit from operations, investing in land or other assets that appreciate and generate income implies running a business.

5. Have you been successful in carrying on other similar or dissimilar activities?

This, again, goes to establishing your expertise as a business owner.

6. Do you have a history of income or losses with respect to the activity?

Both startups and hobbies tend to lose money at some point in their evolution. So the IRS will look toward your history in dealing with these losses. If you have a history of making gains or turning losses into gains, this will support the idea that you are running a business.

Note that early losses during start-up or due to unforeseen circumstances beyond your control (such as disasters or theft) do not suggest that you are engaging in a hobby. Remember that the determination comes back to intent.

7. Did the activity make a profit, even a small one, in three of the last five years?

Occasional large profits mixed with frequent small losses or investing in future profits indicate a business motive.

8. Do you have no substantial income or capital from other sources?

If you have significant income from other sources, this supports the idea of you engaging in a hobby. If you rely on this activity for income, then it is much more likely a business.

9. Does the activity lack personal pleasure or recreational elements?

If the activity does not involve personal or recreational appeal, this could indicate a profit motive. In contrast, something you do for fun suggests more of a hobby.

If you found yourself answering “yes” to most of the above questions, your activity likely constitutes a business.

On the other hand, if you answered “no” to most of the questions, you probably operate as a hobby.

But also remember that this is not a black and white situation; the real question is your intent. No one “yes” makes you a business instead of a hobby; it is the entire package together that will support your claim one way or the other.