Business or Hobby?

Many people engage in hobbies that they take very seriously. These activities may start out small in time and expense, but grow extensively as time passes. “Hobbyists” may then wonder whether they have become business owners.

The distinction is important from a tax perspective. A business owner may be able to write off certain losses. A hobbyist cannot. But where is the line between the two?

Year after year, the courts are called upon to settle disputes between the IRS and taxpayers over the “hobby versus business” question. A recent case in the U.S. Tax Court highlighted some of the issues.

Breeding horses

Keith and Rhonda Schumacher loved horses. In 2001 they began operating Schumacher Quarter Horses (SQH), a sole proprietorship for breeding show horses, on their 50-acre property.  Over the years they invested in breeding horses and infrastructure, including building a hoop barn at a cost of $230,000 to permit riding throughout the year.  The SQH horses had considerable success in national competitions.  Their herd of horses ranged from 10 to 25 from 2017 through 2019, the years that the IRS chose to audit.

Keith was a veterinarian, and the couple’s income was significant.  They reported some income from the SQH activities and much larger losses.  From 2010 on, they never showed a net profit.  IRS disallowed the losses for the three years in question, ruling the couple did not operate SQH for profit, and imposed a significant penalty for understatement of their tax liabilities.

To guide taxpayers on determining whether their hobby might qualify as a business, the IRS suggests these questions [https://www.irs.gov/newsroom/is-that-activity-just-a-hobby-or-a-business]:

• Is there an intent to make a profit?
• If the activity makes a profit, how much is it?
• Can they expect to make a future profit from the appreciation of the assets used in the activity?
• Do they depend on income from the activity for their livelihood?
• Are any losses due to circumstances beyond their control or are the losses normal for the startup phase of their type of business?
• Are operations adjusted to improve profitability?
• Is the activity carried out like a business with complete and accurate books and records kept?
• Do the taxpayers and their advisors have the knowledge needed to carry out the activity as a successful business?

Although the Schumachers satisfied some of these tests, on balance the Tax Court concluded that it was not enough.  “The Schumachers derived substantial pleasure from breeding, raising, training, racing, and showing horses, and our review of the other factors indicates that the Schumachers did not have a profit motive.”  The losses were not allowed for tax purposes, and additional taxes of over $200,000 were due.

Still, the Tax Court ruled that the couple had filed their tax returns in good faith, relying on a professional tax preparer, and so the tax penalty was cancelled.

Making the right call in the hobby-versus-business conundrum is difficult, especially because the ultimate decision is likely to be based heavily on the specific facts in each taxpayer’s situation. If you believe that your pastime is more business than hobby, or likely to become so, seek guidance from tax professionals as soon as possible.

(September 2026)

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