Do you have a side activity generating income—or losses—on your tax return? If you’re deducting losses on your Form 1040, it’s critical that your activity qualifies as a business in the eyes of the Internal Revenue Service.

The IRS often challenges money-losing ventures, reclassifying them as hobbies. Why it matters: under the Tax Cuts and Jobs Act (still impacting 2024–2026 filings), hobby expenses are not deductible, while business losses generally are.

So what determines business vs. hobby? The key is profit motive—your intent to earn a profit. The IRS evaluates several factors:

Operating in a businesslike manner (separate accounts, accurate records, strategic changes)

Expertise or use of qualified advisors

Time and effort invested

Expectation of asset appreciation (common in real estate)

History of income vs. losses (occasional profits help your case)

Success in other ventures

Your financial situation (consistent losses with substantial outside income may raise flags)

Degree of personal enjoyment (activities with high recreational value face more scrutiny)

No single factor is decisive—the IRS looks at the full picture.

Current planning insight: With increased IRS enforcement and continued limits on miscellaneous deductions, documenting your intent and operations is more important than ever. Clean books, a written business plan, and evidence of efforts to improve profitability can make the difference.

If your side activity is consistently losing money, it’s time to reassess—either strengthen your business position or adjust expectations.

Need help protecting your deductions or turning your side gig into a profitable business? Pricewise Business Solutions can guide you.