Have you started a new business? Planning to start one? If so, the tax difference between a business and a hobby could turn out to be very important to you.
If the IRS considers your new venture a business, you can deduct losses against other income. But if it’s classified as a hobby, losses are generally deductible only to the extent of hobby income (with the additional limitation imposed on them as miscellaneous itemized deductions subject to the 2% of adjusted gross income floor).
The tax law presumes that an activity is a business, not a hobby, if it is profitable in three out of the last five consecutive years (two out of seven consecutive years for activities involving horses).
Some factors used by the IRS to determine whether you have a hobby or a business include the following: