Hobby Income and Expenses

If the IRS classifies your business as a hobby, really bad things happen such as the income is taxable as other income but you can't deduct any of the expenses. There is a presumption that your business is not a hobby if you have a profit in at least 3 out of 5 years. However if you can prove you have a profit motive through facts and circusmstances then you are still ok even if you don't meet the 3 out of 5 year test. How do you prove you have a profit motive? You have to conduct your business in a professional manner by having a business checking account, a business credit card, keeping good records, having a business license, having a business plan, and having business cards. The IRS will look at the time and effort you spend on the activity and whether the activity is a fun one. If you are having too much fun, then the presumption is it is a hobby.