The short answer
If you carry on an activity to make a profit, it is a business: you report it on Schedule C, deduct ordinary and necessary expenses, can use a loss against other income, and generally owe self-employment tax on net earnings of $400 or more. If it is a hobby, you still report all the income — on Schedule 1 — and for 2025 you cannot deduct the activity's ordinary expenses, although cost of goods sold can reduce gross income and deductions you could take anyway are still allowed. IRS draft instructions say the same rule continues for 2026. What decides it is your profit motive, not the form you receive or the line you use.
How the IRS tells a hobby from a business
No single factor decides it. IRS Tax Tip 2023-61 lists these questions:
- Do you carry on the activity in a businesslike manner, with complete and accurate books and records?
- Does the time and effort you put in show you intend to make a profit?
- Does the activity make a profit in some years, and how much?
- Can you expect a future profit from the appreciation of assets used in the activity?
- Do you depend on the income for your livelihood?
- Are losses due to circumstances beyond your control, or normal for the startup phase?
- Do you change your methods to improve profitability?
- Do you and your advisors have the knowledge to run it as a successful business?
Publication 334 adds that activities done as a hobby, or mainly for sport or recreation, come under the not-for-profit limits.
The profit presumption and Form 5213
| Activity | Presumed to be for profit if | Form 5213 postpones the decision until |
|---|---|---|
| Most activities | Gross income exceeds deductions in 3 or more of 5 consecutive years | The end of the 4th year after the first year |
| Mainly breeding, training, showing, or racing horses | Gross income exceeds deductions in 2 or more of 7 consecutive years | The end of the 6th year after the first year |
- The presumption helps but is not required. An activity that fails it can still be a business under the factors above.
- When to file Form 5213: within 3 years after the due date (without extensions) of the return for the first year of the activity, or within 60 days after an IRS notice proposing to disallow deductions, whichever applies. It cannot be used if you have been in the activity more than 5 years (7 for horses).
- Joint returns: both spouses must sign the election, even if only one runs the activity.
- Trade-off: filing the election generally extends the IRS's time to assess tax attributable to the activity until 2 years after the due date of the return for the last year of the presumption period.
Business vs. hobby: how each is reported
| Business | Hobby | |
|---|---|---|
| Where income goes | Schedule C (Form 1040) | Schedule 1 (Form 1040), line 8j for 2025 |
| Cost of goods sold | Subtracted on Schedule C | Can be subtracted from gross receipts to figure gross income, if done consistently |
| Other expenses | Ordinary and necessary business expenses deducted on Schedule C | Not deductible for 2025; IRS draft guidance says not deductible for 2026 |
| Loss | Can generally offset other income | Not allowed; you are taxed on the activity's gross income |
| Self-employment tax | Generally due on net earnings of $400 or more | Not self-employment income if it is truly a hobby |
Hobby expenses in 2025 and 2026: what the IRS sources say
- 2025: Publication 529 says hobby expenses are miscellaneous itemized deductions and "can no longer be deducted." The 2025 Schedule A instructions say only listed expenses can be deducted on line 16, and hobby expenses are not on the list.
- 2026 and later: the IRS draft 2026 Instructions for Form 8960 say section 70110 of P.L. 119-21 indefinitely suspended miscellaneous itemized deductions. Because hobby expenses are miscellaneous itemized deductions, they remain nondeductible. That statement is from a draft, so confirm it in the final 2026 instructions.
- What is still allowed: Publication 535 says gross income from a not-for-profit activity can be figured by subtracting the cost of goods sold from gross receipts, consistently and under generally accepted accounting methods. It also says deductions you can take for personal as well as business activities — such as home mortgage interest, taxes, and casualty losses — are allowed in full on Schedule A, subject to their own limits.
- The conflicting sentence: Publication 525 (2025) says hobby deductions "can't total more than the income you report from the activity and can be taken only if you itemize." That was the rule before 2018. It conflicts with Publication 529 and the Schedule A instructions, and this guide follows those more specific sources.
Self-employment tax: the label does not decide it
The 2025 Form 1040 instructions say not to report self-employment income on Schedule 1, lines 8a–8z, and treat hobby income as income that is not self-employment income. But calling an activity a hobby, or reporting the income on Schedule 1, does not make it one. If the facts show a profit motive, the activity is a business and its net earnings are subject to self-employment tax. The type of form you receive — 1099-K, 1099-NEC, or none — does not change that either.
Examples (2025)
| Nina | Omar | Jae | |
|---|---|---|---|
| Activity | Knits scarves for fun and sells a few at craft fairs | Sells refurbished bikes online, keeps books, advertises, works 20 hours a week | Sells his own used furniture before moving |
| Income and expenses | $1,200 of sales; $400 of yarn used in the scarves she sold; $1,100 of booth fees and other supplies | $30,000 of sales; $18,000 of costs | $900 received; originally paid $4,000 |
| Treatment | Hobby: $800 ($1,200 − $400 cost of goods sold) on Schedule 1, line 8j; the $1,100 is not deductible | Business: Schedule C net profit $12,000; self-employment tax applies | Personal sale at a loss: no income to report, loss not deductible |
Nina pays tax on $800 even though she spent more than she earned. Subtracting the $400 assumes she figures cost of goods sold consistently from her records. If she started running the activity like a business, with records and a plan to make a profit, the answer could change. Omar's self-employment tax is figured on Schedule SE. All three examples are simplified.
Common mistakes
- Not reporting hobby income because the activity lost money.
- Deducting hobby expenses on Schedule A under the old pre-2018 rule — or, the opposite mistake, forgetting cost of goods sold and deductions you could take anyway.
- Calling a business a hobby to avoid self-employment tax.
- Calling a hobby a business to deduct years of losses without a real profit motive.
- Treating a Form 1099-K as proof of income — it reports gross payments, including personal sales.
- Relying on old IRS tips that mention a $600 Form 1099-K threshold.
Long-running activities with repeated losses, horse and farm activities, and creative work that is starting to earn money often need a careful look at the facts. State rules may differ.