Business vs. Hobby

The IRS requires that a business has a profit motive in order for you to deduct reasonable, ordinary , and necessary business expenses from it. How do you prove a profit motive? If you show a profit in 3 out of 5 years on a schedule C business, that will work. If you don't, the IRS will wonder why you are working without making any money. The IRS might think you are trying to write off personal expenses against your other W-2 income. There are also 9 factors which the IRS looks at to determine a profit motive such as the time and effort in the activity, the manner the activity is carried on, and whether there are elements of personal pleasure or recreation. It is a facts and circumstances test. If the IRS determines that your activity is not a business but a hobby, then you have to report the income on line 21 of form 1040 and the expenses are not deductible.