IRS - Hobby vs. part time?

Discussion in 'Business Operations' started by BAMARED, Feb 24, 2003.


    BAMARED LawnSite Member
    Messages: 206


    I was just wondering how the IRS/Gov.'t. determines the difference between a guy working part time as a LCO vs. a guy working it as a hobby?

    I think that the answer maybe if you're in it for a profit, then your a part timer. However, if you're in it and never show a profit and don't ever claim any deductions, etc., then it's a hobby. Right?


  2. walker-talker

    walker-talker LawnSite Platinum Member
    from Midwest
    Messages: 4,771

    If you perform the work and accept money, then it's a business. If you accept money and don't make a profit, then you are a poor business man. If you do it for free, then it might be considered a hobby. I enjoy what I do, but it's still a business because I demand compensation for work performed. Now you could accept donations and call it a non-profit business....haha.

  3. Fvstringpicker

    Fvstringpicker LawnSite Fanatic
    Messages: 7,663

    Generally, a hobby is something done for pleasure which you don’t expect to make a profit. To determine if you are carrying on an activity for profit , the irs is going to consider if the LCO is conducted in a business like manner. They will look at such things as:
    1. The business makes a profit in some years.
    2. You have the background needed to carry on the business.
    3. You depend on income from the activity to improve your lifestyle (pay bills)
    4. Losses are normal in the start-up phase
    5. You change operations in an attempt to improve profits.
    6. If the effort you put into it indicates you intend to make a profit
    7. You have been successful in making a profit in the past.

    Personally, I think the IRS would have a hard time arguing that a LCO is a hobby unless they see how slow I am.
  4. dougaustreim

    dougaustreim LawnSite Senior Member
    Messages: 488

    If you accept money from someone else, that is income and the IRS will want their cut. Then you will want to deduct your expenses. If you end up showing a loss, it can offset other income, but only for so long. Eventually you have to show a profit or at least show that you are making a definate effort to do so. If you continually lose, it would probably be considered a hobby and you would no longer be able to use the loss for an offset of other income.

  5. jkkalbers

    jkkalbers LawnSite Member
    Messages: 144

    I believe you either have to show growth or profit 3 out of 5 years otherwise they will consider it a hobby.
  6. Lombardi

    Lombardi LawnSite Senior Member
    Messages: 538

    Turning your hobby into a business would be a very wise choice. Give your hobby the "image and appearance" of a business and demonstrate a real profit motive. According to the IRS tax code. a profit motive is presumed if you earn any net income in any 3 out of 5 business years. The key word here is net income, not profit. In fact, you don't ever have to show a profit if you can show a profit motive.
    I have seen a few posts from people stating that they wish they had a $20-50,000 tax bill to pay since this is a sign of success. This is not necessarily true. I have seen other posts stating if you don't pay tax at the end of the year then you are either not reporting all of your income or you are a poor business man. This is not entirely true.
    I am sure a lot of people will disagree with this, but if you pay little or no tax at the end of the year, you can still have a very successful year with your business. There are literally thousands of ways to legally reduce your tax debt and still report all of your income. One of the best and legal ways to accumulate wealth is to reduce your taxable income.
    Some very good reading about all of this is: "The Millionaire Next Door" and "How To Pay Zero Taxes" from which I referenced above.

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