When does a side activity become a Schedule C business versus a hobby?

Apply two layers. First, the basic trade or business test: continuity, regularity, and a primary purpose of income or profit. If the activity is sporadic with weak profit motive, it never reaches the trade or business threshold and Schedule C is wrong from the start.

Second, if the activity has continuity and regularity but profit motive is unclear, apply the Treasury Regulation 1.183-2(b) nine-factor test:

For your crafts client, ask:

• Does she keep separate records and a business bank account?
• Is there a written business plan or at least a documented growth strategy?
• Is revenue growing year over year?
• Does she have expertise or seek advice?
• Are losses decreasing as she gains experience?

Three years of losses with no documented plan and no growth would lean hobby. Three years of growing revenue with business-like conduct would lean Schedule C even without profitability yet. The Section 183(d) safe harbor of three profitable years in five does not apply yet, but it is the ultimate destination she should be working toward.

For the return you are preparing now, document the basis for the classification in your workpapers. The preparer due diligence standard applies.