Hello lcmceachin!
Thank you for joining us for the event today, and for your great question!
The main thing the IRS looks at in determining business versus hobby is the intent to earn a profit. While it's awesome that you do give out services for free as part of your business, you may be inadvertently putting yourself at risk of not being considered a business for tax purposes.
It's generally okay to be generous in giving out free services, but be mindful of whether or not you're still operating the business in a way that is likely to generate a profit. If you're giving out free services and running at a loss every year, you may need to consider minimizing your expenses, doing less work for free, or charging more for your paid services to show you are still operating as a for-profit business.
The IRS will look at a number of facts and circumstances in determining versus hobby versus business, so here is a list they give of things you can consider (you don't have to meet every test; I bolded some that might be most applicable):
- Do you carry out the activity in a businesslike manner and keep complete and accurate books and records?
- Does the time and effort you put into the activity show you intend to make a profit?
- Does the activity make a profit in some years – if so, how much profit does it make?
- Can you expect to make a future profit from the appreciation of the assets used in the activity?
- Do you depend on income from the activity for your livelihood?
- Are any losses due to circumstances beyond your control or are the losses normal for the startup phase of their type of business?
- Do you change your methods of operation to improve profitability?
- Do you and your advisors have the knowledge needed to carry out the activity as a successful business?
IRS source: https://www.irs.gov/newsroom/hobby-or-business-heres-what-to-know-about-that-side-hustle
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