I read your post about Mary Kay and I am still confused about hobbies. I own a bunch of blogs. I make money on some of them and I lose money on some of them. Does this make me a hobby?
You’re right to be a little confused because this is not an easy area of the law to understand. There are no hard and fast rules, just a set of factors that the IRS considers. Let me see if I can make it a little more clear.
First of all, the Mary Kay post that you’re referring to is here. In that post, I included a list of factors that the IRS considers when determining whether you’re operating a business or pursuing a hobby. The factors are:
- Whether you run your business as a business.
- How much time and effort you expend in the activity.
- Your level of expertise.
- Your track record.
- Your financial picture.
- Whether you continue to change your business practices in order to make money.
- The nature of your losses.
- Whether you expect the value of your business to grow.
- How much fun you’re having.
The list boils down to two main factors: your motive and your money. The IRS assumes that you’re in business to make money. This doesn’t mean you have to get rich and it doesn’t mean that you have to make money every single year. But the IRS will look at patterns and will assume that a business (as opposed to a hobby) will eventually make a profit.
In your case, you are both making money and losing money on your blogging. That falls along the lines of “you win some, you lose some.” And in one or two years, if you lose more than you make, that’s probably okay. But if you’re losing more than you’re making over a period of years, you’re going to raise some eyebrows.
Let’s think about this: what would a reasonable business person do if he or she owned a number of enterprises and a few of them were losing money? Switch gears, of course. You’d try a couple of different things… Check out #6 above – that’s one of the factors that the IRS looks at.
And if switching gears doesn’t work out, what next? You’d likely shut that venture down. If I have four successful stores and the fifth is failing, no matter what I try, I’d probably shut the fifth one down. It doesn’t make good economic sense to keep it going at all costs – unless the decision to keep it going is not actually a business decision.
As it relates to blogging, if you’re writing for three or four sites and a couple are doing well and one or two are constantly losing money, the logical business decision would be to focus on those that are making money. This is because the IRS is assuming that if you’re in the business of blogging, you’re blogging to make money, as a means of improving your livelihood (see #5 above).
If, on the other hand, you’re writing the money-losers because you just simply like writing them (see #9 above) – without a care as to whether they ever turn a dime – then you’re probably a hobby blogger. That’s not a bad thing. There’s nothing that says that every person who picks up a keyboard has to be a professional blogger. It’s okay to do it just because you like doing it.
From a tax standpoint, there’s no real downside to being a hobbyist so long as your expenses are low. The income is reportable equally in both situations (though not at the same place). The main difference from a tax standpoint between being engaged in a business versus pursuing a hobby relates to expenses: where to report and how much to report.
Where to report: Expenses related to a business would be fully deductible on a Schedule C. However, expenses related to a hobby would be reported as miscellaneous deductions on a Schedule A. Hobby expenses would also be subject to the 2% floor – meaning that you can only deduct those expenses which are more than 2% of your AGI.
Here’s an example: Let’s say that your AGI is $20,000 and you had combined miscellaneous deductions of $1,000. They included hobby expenses from blogging of $500; tax preparation expenses of $200; and unreimbursed expenses from your other job of $300. You can deduct $600 of your expenses. This is because 2% of $20,000 (your AGI) is $400. Your expenses are $1,000. $1,000 (expenses) less $400 (2% floor) = $600. Get it?
How much to report: If you’re pursuing a hobby, you can only take deductions up to the limit of your hobby income; you cannot incur a loss. With a business, you can report a loss. Again, be careful. If you constantly report a loss, the IRS will wonder whether you’re actually a business.
I’ll write more about what you can deduct in an upcoming post… But for now, think about your time and income as it relates to your blogging activities. That should give you the answer you need as to whether you’re running a business or pursuing a hobby.
Like any good lawyer, I need to add a disclaimer: Unfortunately, it is impossible to give comprehensive tax advice over the internet, no matter how well researched or written. Before relying on any information given on this site, contact a tax professional to discuss your particular situation.
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- Blogger Tax Deductions and Tips
- Fix The Tax Code Friday: Hobby Loss Rules