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Here are the things taxpayers should evaluate to decide whether they have a hobby or a business:

  • Whether the taxpayer carries out the activity in a businesslike manner and maintains complete and accurate books and records.

  • Whether the time and effort the taxpayer puts into the activity show they intend to make it profitable.

  • Whether they depend on income from the activity for their livelihood.

  • Whether any losses are due to circumstances beyond the taxpayer's control or are normal for the startup phase of their type of business.

  • Whether they change methods of operation to improve profitability.

  • Whether the taxpayer and their advisors have the knowledge needed to carry out the activity as a successful business.

  • Whether the taxpayer was successful in making a profit in similar activities in the past.

  • Whether the activity makes a profit in some years and how much profit it makes.

  • Whether the taxpayers can expect to make a future profit from the appreciation of the assets used in the activity.


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