Is it a “Hobby” or “Business”?
Part 1
July 22, 2004
By Jim Harnsberger, Sr. Tax Analyst

SAN DIEGO – The question of an activity being one of a “hobby” or one classified as a “business” involves numerous considerations. The IRS generally takes the position that an activity will be deemed a “hobby” if, in the analysis, the taxpayer fails to demonstrate that a series of objective standards is not met. These are commonly known as the “Nine-Point” test.

For an activity to be determined to fall within the meaning of the code, (Section §183, Internal Revenue Code), consideration is given to several factors, with no one factor being the determining or controlling focus. The problem in most cases is that taxpayers fail to understand the requirements necessary to meet these standards, and more important, tax preparers have little understanding of specific legal tests involved with these determinations.

This series of articles will address first, each of the Nine-Point tests used by IRS and the courts in determining the character of the activity. Following these points, the next part of this series will go into detail on how a taxpayer can employ successful measures to increase the likelihood of a favorable determination in the event of an audit or examination.

The Nine-Point Test – Let us first list each of the Nine-Point test considerations that will be made in this determination. The regulations promulgated under Section §183 list the following factors normally taken into account:

1. The manner in which the activity is conducted
2. The expertise of the taxpayer
3. The time expended on the activity
4. The expectation of profit
5. The success in other similar or dissimilar activities
6. The history of income and losses
7. The amount of “occasional” profits
8. The financial status of the taxpayer
9. The extent to which pleasure or recreation may be a factor

Each of these factors has with it specific criteria used in making such determinations. Part 2 of this series will explore each of the Nine-Points and the criteria used in determination of the character of the activity. San Diego based, Tax Smart America, a local firm utilizing its intellectual Business Methods Patent provides an in-depth analysis at no cost. For more information you may contact the company at (619) 469-5800 for a FREE evaluation.