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Level 7

Business is now a hobby

I claimed a loss in 2017 from a business that, last year, became apparent is more of a hobby.  Do I need to amend my 2017 taxes? 2017 was the first year of the business.  Thanks in advance!

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Employee Tax Expert

Business is now a hobby

Not necessarily. If at the time you were operating your business with a true profit motive, it's possible that you would be entitled to deduct a loss for your attempt to earn income in 2017. This could certainly be the case since 2017 was your first year, and you were possibly still learning the ropes of your business. Later, if you wound up pursuing the activity more as a hobby, you'd be correct to report it as a hobby on your 2018 return.

 

The IRS lists nine factors which are used to distinguish between a hobby and a business. Note that one of them is whether your losses are due to circumstances beyond your control (or are normal in the startup phase of your type of business). The IRS looks at the facts and circumstances of each situation. There's no one strict rule for hobby vs business.

5 Comments
Employee Tax Expert

Business is now a hobby

Not necessarily. If at the time you were operating your business with a true profit motive, it's possible that you would be entitled to deduct a loss for your attempt to earn income in 2017. This could certainly be the case since 2017 was your first year, and you were possibly still learning the ropes of your business. Later, if you wound up pursuing the activity more as a hobby, you'd be correct to report it as a hobby on your 2018 return.

 

The IRS lists nine factors which are used to distinguish between a hobby and a business. Note that one of them is whether your losses are due to circumstances beyond your control (or are normal in the startup phase of your type of business). The IRS looks at the facts and circumstances of each situation. There's no one strict rule for hobby vs business.

Level 7

Business is now a hobby

My apologies on the delay in getting back to you, as your response was greatly appreciated when received!

 

So, my 2018 expenses came in WAY higher than the payments I received; is there something "official" I need to file, in order to explain why I'm not reporting a business in the year after I had a reported business?  Based on the continued non-profit activity, I don't even have a hobby to report for 2018.

 

Not sure if I'm allowed the follow up question, so apologies, if not!

Employee Tax Expert

Business is now a hobby

You are more than welcome to follow up! But I do have bad news about hobby income/expenses. In the past, you'd report hobby income under Other Miscellaneous Income in TurboTax. Then, you could be able to claim a deduction for your hobby expenses, up to the amount of income you made. You would claim the expenses as a  Miscellaneous Deduction, subject to a 2% floor limitation. In 2018, you still report hobby income as Miscellaneous Income.

 

But now, in 2018, the new tax law doesn't even let you do that. The IRS expects you to report your income from your hobby but doesn't allow any deductions for expenses at all.  See this link to the TurboTax discussion of hobbies.

 

If you don't have any income to report from this hobby, then you don't have to report anything at all on your return, not even to tell the IRS that you aren't doing this anymore.

Level 7

Business is now a hobby

Thank you so much for this!  Your responses were very informative and easy to understand.  Thanks for taking the time to provide the detail.  

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Employee Tax Expert

Business is now a hobby

I'm so glad that I could help!