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The Difference Between a Hobby and a Business A hobby is any activity that a person pursues because they enjoy it and with no intention of making a profit. While most hobbies will never turn a profit, taxpayers should be aware that income earned from hobbies must be reported on their tax returns. Determining whether a hobby has grown into a business can be confusing, however. As such, taxpayers should know about the nine factors used by the IRS that they must consider when determining whether their activity is a business or hobby: 1- Whether the activity is carried out in a businesslike manner and the taxpayer maintains complete and accurate books and records. 2- Whether the time and effort the taxpayer puts into the activity shows they intend to make it profitable. 3- Whether they depend on income from the activity for their livelihood. 4- Whether any losses are due to circumstances beyond the taxpayer's control or are normal for the startup phase of their type of business. 5- Whether they change methods of operation to improve profitability. 6- Whether the taxpayer and their advisors have the knowledge to carry out the activity as a successful business. 7- Whether the taxpayer was successful in making a profit in similar activities in the past. 8- Whether the activity makes a profit in some years and how much profit it makes. 9- Whether the taxpayers can expect to make a future profit from the appreciation of the assets used in the activity.