Ina Steiner EcommerceBytes Blog
News and insight focusing on ecommerce.
by Ina Steiner, Editor of EcommerceBytes.com
Wed Dec 12 2018 21:09:42

Does the IRS Consider Your Business a Hobby?

By: Ina Steiner

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Just because you sell online doesn't mean you are a business in the eyes of the IRS, as a seller of sports memorabilia discovered. And if your ecommerce business doesn't stand up to IRS scrutiny, it could be costly, especially in light of a change included in the new tax bill which affects sellers for the 2018 tax year.

Tony Nitti's December 9th column in Forbes focused our attention on the issue. He's a master at making taxes interesting (the Tony Bourdain of taxes), and the cases he described in this piece are eye-opening. 

The column referred to a 2014 case that's especially worthy of review in light of the new tax law. The IRS found that a taxpayer (Akey) operated his sports memorabilia business as a hobby rather than a profit-driven business - therefore, could not necessarily expense all of his costs. (Until this year, you could deduct hobby expenses, but only up to the amount of your hobby income.)

How does the IRS determine a "business" is actually a "hobby"?

Nitti listed nine factors. For example, the first factor is, "The manner in which the taxpayer carries on the activity." Nitti's take: "Does the taxpayer complete accurate books? Were records used to improve performance?"

Nitti provided context by comparing the practices of the owner of the sports memorabilia business (Akey) who lost his case to another taxpayer Crile, who was successful in arguing her case in tax court. The comparison is helpful in understanding what the IRS is looking for when determining whether your activities are a business or a hobby - and can help you make changes if needed.

For example, Nitti wrote:

"In Akey, the taxpayer did nothing to acquire expertise in baseball card collecting aside from purchasing price guides, which as the court pointed out, is pretty much the one mandatory acquisition for anyone interested in buying and selling cards, even if it were merely as a hobby. As a result, this purchase did nothing to differentiate his activity as a business. 

"While not everyone can achieve the level of success enjoyed by Crile, the taxpayer in Akey could have established that he routinely attended trade shows, conducted sophisticated research, and consulted with industry experts about buying and selling tactics to bolster his argument that his activity was a business."

Nitti writes about other cases, one in which the ninth factor played a role: "Does the activity lack elements of personal pleasure or recreation?" Yes, the IRS actually takes into consideration whether a taxpayer enjoys what they're doing to help determine if they run a business or a hobby!

So where does the new Tax Cuts and Jobs Act come into play?

Previously, businesses deemed a "hobby" could deduct certain losses on Schedule A under itemized deductions. However, the new tax law eliminates most miscellaneous itemized deductions - including "Hobby losses."

Nitti explains that the ramifications of being categorized as a hobby are severe, summing up: "from 2017 on, if you're conducting a hobby, and not a business, you have to include all of the income, but can't deduct any of the expenses. Ouch."

In this MarketWatch article titled, "You can't deduct hobby-related expenses under the new tax law - but don't give up hope," the author expresses a similar reaction: "So under the new law, you cannot deduct any hobby-related expenses, but you still must report 100% of any revenue from the hobby activity as income and pay tax on it. Yikes!"

The author went on to say that he expects IRS auditors to focus even more attention on individuals with money-losing sideline activities.

It's absolutely imperative that you conduct your activity in a businesslike manner, Nitti says - and it's not enough to simply keep a Quickbooks account. He ends his column with some concrete advice. 

Our advice: add this article to your list of end-of-year tax planning activities.

Comments (17) | Leave Comment | Permalink
Readers Comments

Perminate Link for Does the IRS Consider Your Business a Hobby?   Does the IRS Consider Your Business a Hobby?

by: ySirTinLee This user has validated their user name.

Thu Dec 13 00:40:41 2018


These are the 9 factors mentioned that are considered by the IRS:
1.Whether you carry on the activity in a businesslike manner and maintain complete and accurate books and records.
2.Whether the time and effort you put into the activity indicate you intend to make it profitable.
3.Whether you depend on income from the activity for your livelihood.
4.Whether your losses are due to circumstances beyond your control (or are normal in the startup phase of your type of business).
5.Whether you change your methods of operation in an attempt to improve profitability.
6.Whether you or your advisors have the knowledge needed to carry on the activity as a successful business.
7.Whether you were successful in making a profit in similar activities in the past.
8.Whether the activity makes a profit in some years and how much profit it makes.
9.Whether you can expect to make a future profit from the appreciation of the assets used in the activity.
You may find more information on this topic in section 1.183-2 (b) of the Federal Tax Regulations.

Perminate Link for Does the IRS Consider Your Business a Hobby?   Does the IRS Consider Your Business a Hobby?

by: Moonwishes This user has validated their user name.
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Thu Dec 13 01:08:39 2018

While it might not be on the above list, I think that the IRS would also want to see bookwork from the beginning of your time buying and selling, not waiting until that January through April 15 period when suddenly some folks get a 1099 MISC are trying to figure out how to get out of paying taxes. Then they are scrambling to make up expenses for the prior year which is almost impossible without doing it regularly. Or depending on a venue for their bookwork which can tell you how much money you made there, but other than the venues fees they have no idea what your expenses are. If they didn't keep any bookwork as a business person would, then yeah, they are playing at a hobby where maybe they made money or maybe they didn't. In the 17 years, we have been selling online every year without exception in some forum people are suddenly surprised to find that they have to tell the IRS about what they have been doing. Last year a guy figured since he didn't get a 1099 from Amazon that he didn't have to pay taxes on the $19K he made on Amazon since he didn't get 1099 MISC. Where do people get such whacky ideas?

Unfortunately, the people that need to see these sorts of posts aren't reading them. They don't even consider what they are doing as a hobby much less a business! And they have every argument in the world for why they don't have to pay taxes. I think I have heard them all. The last thing I want to do is tangle with the IRS or the state boys. For awhile our local tax lady was harder to deal with than the IRS but finally got kicked out of her job and then folks found out the money she insisted they owed, they didn't but at that point, the new tax guy could only go 3 years back for refunds. Not all the way back for the money she stole.

Perminate Link for Does the IRS Consider Your Business a Hobby?   Does the IRS Consider Your Business a Hobby?

by: BargainzBabylon This user has validated their user name.

Thu Dec 13 01:37:06 2018

Some of these criteria are far too subjective.  

Perminate Link for Does the IRS Consider Your Business a Hobby?   Does the IRS Consider Your Business a Hobby?

by: Chicago48 This user has validated their user name.

Thu Dec 13 04:17:23 2018

#1, people need not fear the IRS.  Their budget and agents have dwindled considerably and they're not able to do as many audits.  They're operating old computer equipment.
#2, file taxes ANYWAY, just to be safe.

Perminate Link for Does the IRS Consider Your Business a Hobby?   Does the IRS Consider Your Business a Hobby?

by: sasikat9 This user has validated their user name.

Thu Dec 13 06:15:37 2018

Hard to feel any sympathy for anyone who gets investigated by the IRS for tax fraud. We all know if you make money you owe money. Those that decide they don't need to be find or in jail. Doesn't matter if its a hobby or a business.

Perminate Link for Does the IRS Consider Your Business a Hobby?   Does the IRS Consider Your Business a Hobby?

by: ZZ This user has validated their user name.

Thu Dec 13 07:20:50 2018


Does anybody else sense that this is all about businesses that report a loss, not a profit?

Perminate Link for Does the IRS Consider Your Business a Hobby?   Does the IRS Consider Your Business a Hobby?

by: Windkissed This user has validated their user name.
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Thu Dec 13 08:13:29 2018

It is insulting to begin with to call what anyone does for money a hobby and not a business.  I have been told my ebay and etsy businesses are hobbies because I don;t bring in large amounts of money.  You cannot make someone buy your goods no matter how hard you try.  If you deal in a certain niche you have to wait for the right buyers.  Just because I don;t bring in mega millions or even multiple thousands does not mean I'm not a business.  I do all the things necessary to be a business, keep records, and all the other work involved in making what I do a viable business.  I would love to make more money and increase my inventory which I tried to do with Ebay and Etsy.  I even upgraded to a premium store on ebay and as soon as I did my sales dropped 100%.  I reversed it, my sales have not been the same since.

I have been trying to boost my Etsy Handmade Jewelry as well by doing my own advertising, marketing, etc.  I am still trying to boost my Etsy shop and have yet to make a sale.  

There is alot of competition out there for online sales its ridiculous to pass judgement on someone's business as being a hobby or a business when there is money coming in that someone needs.  The IRS is just there to make everyone's lives miserable.  I guess if you are miserable you might be considered a business.

I work both my Ebay Store and Etsy Store 24/7 but they still expect us to give our inventory away.

Perminate Link for Does the IRS Consider Your Business a Hobby?   Does the IRS Consider Your Business a Hobby?

by: Moonwishes This user has validated their user name.
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Thu Dec 13 08:29:47 2018

Many normal startups lose money in their beginning years and I have heard that the IRS figures small businesses take up to 5 years to make a profit. If you aren't making a profit after 5 years, then it may be time to reevaluate your business.

@Windkissed, you might want to through your hat into the eCRATER ring as well. At least you would have no listing fees. You would have to promote your inventory, which while I have never sold on Etsy, I promoted my inventory all the time when I had a sore on eBay back about 10 years ago. Listing fees can kill a seller with slow sales! If nothing else, eCRATER is very pro-seller and treats us like adults running our own stores. Some rules yes, but none that are onerous.

Perminate Link for Does the IRS Consider Your Business a Hobby?   Does the IRS Consider Your Business a Hobby?

by: Flying Childers This user has validated their user name.

Thu Dec 13 08:37:47 2018

Also- paying sales tax is another criteria that they use.   Make sure you pay your state sales tax and keep accurate records.  In NY you can get in a LOT of trouble if you don't pay it and it is all deductible on your income tax.  I know many people with B&M stores who still screw around with their ST- not a good idea.  I would urge all sellers who make even a small amount of money to pay what they owe to their state.

Perminate Link for Does the IRS Consider Your Business a Hobby?   Does the IRS Consider Your Business a Hobby?

by: Flying Childers This user has validated their user name.

Thu Dec 13 08:40:38 2018

sasikat9- Wow- you're quite the apologist for the IRS, really makes me wonder.

 Does it ever occur to you how utterly CORRUPT the IRS has become?   Can anyone say  "Lois Lerner?"

Perminate Link for Does the IRS Consider Your Business a Hobby?   Does the IRS Consider Your Business a Hobby?

by: bb6 This user has validated their user name.

Thu Dec 13 10:54:24 2018

@Windkissed  Some tips of why you are not selling. You only have 200 items in your store. There are millions upon millions of items on ebay/etsy. You need more inventory to be seen. You have very low priced items (most are $15-25 range), but with that said your items are overpriced. Placemats for $33, cotton napkins for  $25, when they sell ones that although may not be the exact same, look the same at target, hobby lobby, walmart and those stores sell them for $5-10.  And it is very very hard to sell handmade jewelry. Unless you are famous or have ties to expensive stores people won't buy handmade jewelry. Also your pictures are clear, much better then a lot of ebay sellers, but they are not bright enough. Some look very dark and gloomy. Quick fix, buy a vynal white background or seamless white paper for the background. Then go to homedepot, get 2 of the silver clamp lights, then get EcoSmart 75-Watt  or 90 watt indoor bulb for them. Shine them on the front of the items so they reflect the light off the white background and your items will pop.  You need to grab the attention of the buyer. Darker pictures won't do that. You could also invest in your business by buying a light box. Amazon has a very good one with built in LED lights. If you really do want to do this as a business, branch out and sell other items at a higher price point. This will require research but it will be well worth it in the end if you truely do want more sales on these platforms.

Perminate Link for Does the IRS Consider Your Business a Hobby?   Does the IRS Consider Your Business a Hobby?

by: sasikat9 This user has validated their user name.

Thu Dec 13 12:21:33 2018

@flying whatever

Not apologizing for anyone. If you live in the US you pay taxes. If you don't you suffer. The whole US government has become corrupt. What else is new. You don't like it you have two choices. Either pay up or Move to another country. Their is no one stopping you from leaving.


By the way I would hardly think the IRS thinks we are a hobbyist. especially when we pay them thousands each year in taxes. And yes we have butted heads with them more than once. BUT WE HAVE a good accountant and keep great records.

Perminate Link for Does the IRS Consider Your Business a Hobby?   Does the IRS Consider Your Business a Hobby?

by: TomH This user has validated their user name.

Thu Dec 13 14:24:30 2018

Other things to consider and/or do if you are really a business.

Be registered with your state as a business with license as they prescribe. Be registered and collect and pay your state's sales tax if there is one in your state.

Get an IRS Tax ID/EIN. Not necessary for a Sole Proprietorship but does provide more evidence that your are operating a business.

Consider establishing your business as a LLC. LLCs can be established even for a one person business.  Advantages and maybe disadvantages. So do some research.

The thing with the IRS is when your returns come in and the T's are crossed and the I's dotted, and things are done professionally and fit into their templates for what you are doing, it is very unlikely to draw a investigation.

They look for the sloppy, easy money, unusual amounts for the typical business type you are reporting.

All business, regardless of everything else, are/can be subject to just one of the overall compliance survey audits. It is a lottery decision and actually very few are done each year.  

Perminate Link for Does the IRS Consider Your Business a Hobby?   Does the IRS Consider Your Business a Hobby?

This user has validated their user name. by: Rexford

Thu Dec 13 15:01:01 2018

#4 Whether your losses are due to circumstances beyond your control

You mean like eBay?

Perminate Link for Does the IRS Consider Your Business a Hobby?   Does the IRS Consider Your Business a Hobby?

by: dans parts This user has validated their user name.

Thu Dec 13 22:24:58 2018

Sorry, folks, slightly off topic.

@bb6 - which light box on Amazon?  I've been wanting to get a different one than I have, and want one with LED's.  If you have one, what's your experience with it?

Perminate Link for Does the IRS Consider Your Business a Hobby?   Does the IRS Consider Your Business a Hobby?

by: tkg This user has validated their user name.

Fri Dec 14 09:30:01 2018

Other than changes to deductions, this is essentially how the IRS has treated hobby v business for years.  The goal of a business is to ultimately turn a profit so, the IRS is clarifying what is or isn't a business.    If you are selling on Ebay are a business and have been turning a profit consistently (rule of thumb I believe is 3 of 5 years you are profitable), you aren't the emphasis point for this.  It would be people that  for example have extra income, but then incur losses year after year.   Example, someone has an extra $3,000 a year selling maple syrup but then they write off the maint for trees, property taxes, bottling and every year they have a $2,000 loss and they aren't doing anything to improve, they would be a hobby.    Same business, but a person shows they are trying to wait for new trees to  come in to increase supply, trying new processing methods to cut costs, etc... they might then fall into the business category.    

Perminate Link for Does the IRS Consider Your Business a Hobby?   Does the IRS Consider Your Business a Hobby?

by: bb6 This user has validated their user name.

Fri Dec 14 22:00:04 2018

@Dans parts its called AmazonBasics Portable Photo Studio. They also sell it on ebay without the amazon part in title so check around for the best price. It's pretty nice. Better then I thought it would be. They have a video on there that shows everything about it. Folds up if needed, but the built in light was big for me. No messing around with side lamps.



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