How do I tell whether a side activity is a business or a hobby?

Start with profit motive. A side activity can have losses and still be a business, but the facts should show the taxpayer is trying to make money rather than simply offset the cost of a personal pastime.

Useful indicators include:

1. pricing that could realistically produce profit
2. books and records
3. advertising or client development
4. changes to improve results after losses

Suppose Elm Ridge Workshop brings in 3,600 a year from custom wood signs but spends 5,400. If the owner keeps records, adjusts prices, drops unprofitable products, and actively markets the work, the facts are stronger for business treatment than if the owner says, "I would do this anyway even if it never made money."

The exam usually rewards the candidate who focuses on intent and conduct, not just the presence of income.