Do you have income from a freelance activity that you think of as a business? Are you reporting tax losses from a freelance activity on your individual income tax return? Will the IRS consider your freelance work a business and allow your loss deductions, or a hobby and disallow those losses? Like many other tax questions, the answers are “it depends.”
The IRS can contend that money-losing freelance activities are hobbies rather than businesses, and that you cannot deduct tax losses. However, if you can show a profit motive for your freelance activity, even if you have tax losses, you can classify that activity as a business for tax purposes and deduct any business losses to offset other taxable income that you have.
Determining if your hobby has grown into a business can be confusing. Also, some businesses, like artists or actors, can experience losses over several years when they are trying to make a profit. To help avoid confusion, the IRS established factors to consider when determining whether a freelance activity is a business or hobby. These factors include:
- Conducting the activity in a business-like manner by keeping good records and seeking profit-making strategies
- Promoting your business cause by joining professional organizations and participating in networking or marketing events
- Keeping a calendar of activities and financial records
- Following business regulations in your area and professional standards for your profession
- Spending enough time to substantiate that the activity is a business and not a hobby
- Having the expectation of asset appreciation, such as with rental real estate
- Demonstrating success in other ventures, indicating business acumen
- Reporting a history of up-and-down income from the activity and losses caused by unusual events
- Indicating that you can afford to absorb ongoing hobby losses because of significant income from other sources
Determining if your hobby has grown into a business can be confusing. Will the IRS consider your freelance work a business and allow your loss deductions to offset other taxable income? It depends. To help avoid confusion about your freelance activity, the IRS established a number of factors to help you figure it out. You can learn more details at https://www.irs.gov/newsroom/heres-how-to-tell-the-difference-between-a-hobby-and-a-business-for-tax-purposes.