New Tax Law: Business or Hobby?

Business or Hobby for Income Tax Purposes

Nearly three years ago, to the day, I wrote a post about business vs. hobby classification for tax purposes. If you haven’t read that, I highly recommend – it’s short and sweet.

Today, I’d like to expand on that topic a bit as the new tax law, perhaps, throws in some additional considerations.

In simple terms, I recommend that you focus on making whatever activity you’re engaged in an actual business instead of a hobby.

It’s not all that difficult to do but will require some effort.

Under both prior law and the new law after the recent tax reform, your activity is either a business (for profit) or a hobby (not for profit). With the hobby classification, tax law makes you suffer.

Your taxable gross income includes income from any source unless there’s a specific exclusion, and there’s none for hobby income. Thus, tax law taxes your hobby income.

Don’t think that you need a hobby to have what is considered hobby income.

In an article in Tax Notes titled “Potential Pitfalls for Direct Sellers,” author Monika Turek states that there are 15.2 million direct sellers who fall into the tax law–defined hobby category.

Direct sellers include distributors for companies such as Young Living, LuLaRoe, Norwex, and dōTERRA, to name a few.

Certainly, many of the 15.2 million are going to feel cheated by the recent tax reform.

At the other end of the spectrum, you find many hobby-loss tax cases that involve doctors or lawyers who like racehorses or ranching. They too will feel cheated.

Under the recent tax reform, the law taxes your hobby income and gives you a zero deduction for any business expenses of producing that income.

That’s about as draconian as the law can get.

The only way out is to establish your activity as a business. This may or may not be possible, but it is certainly something I might be able to help you with and that we should discuss.

If you have an activity that could be subject to the hobby-loss rules, please get in touch with me now.