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Business v. Hobby – How to Tell the Difference for Tax Purposes
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I think we can all agree that Scarlett Johansson and Tom Hiddleston act for a living. Likewise, the artists whose works sell for millions are clearly in the art business. It took a commitment but they’ve transcended the joy of the activity they love to making a living doing it.But what about the people you’ve never heard of who are engaged in the same activities? They might take classes and get headshots, buy palettes and easels – do all the things they need to do to get a career off the ground. Are they really in the business or are they pursuing a hobby? Sometimes the answer is not clear.The difference between running a business and engaging in a hobby primarily relates to your intention. Is the person engaged in the activity to make a profit or because they enjoy it and have no real concern about making a profit? The IRS has provided some guidelines to help make this determination when the lines are blurred. These guidelines don’t necessarily dictate the result but they can help you and the IRS build a case in either direction.This decision is important. If an activity is a trade or business, the expenses that it generates are deductible as business expenses. Net income derived from such an activity is subject to self-employment tax. If an activity is a hobby, it’s financial aspects are treated differently. Hobby income is reportable as miscellaneous taxable income. It is not subject to self-employment tax since it is not generated by a business activity. Expenses incurred in pursuing a hobby – (often referred to as “hobby losses” within the tax industry – have not been deductible for most taxpayers since the Tax Cuts and Jobs Act (TCJA) of 2018. Prior to that law, taxpayers could deduct hobby losses as miscellaneous itemized deductions to the extent of their hobby income. Miscellaneous itemized deductions would benefit an individual taxpayer if they itemized deductions and their total miscellaneous itemized deductions exceeded 2% of their adjusted gross income. We’ll have to see whether the miscellaneous itemized deduction will be restored when the TCJA sunsets on December 31, 2025. But, for now, no hobby losses can be deducted by an individual taxpayer. Note that this rule regarding not-for-profit losses such as hobby losses applies not only to individuals but to partnerships, estates, trusts, and S corporations. It does not apply to corporations other than S corporations. (Some taxpayers create loan-out corporations so the corporation incurs and deducts the expenses related to their activity. This article will not discuss those structures other than to note that the cost of establishing and maintaining them can make their use prohibitive.)To determine if an activity is a business or a hobby, the first and most clearcut IRS rule is based on the financial results generated by the activity. IRS Publication 535 states, “An activity is presumed carried on for profit if it produced a profit in at least 3 of the last 5 tax years, including the current year.”
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Tax and Financial Insights
by NR CPAs & Business Advisors
2026 IRS Mileage Rates: Key Updates and Insights
The IRS has rolled out the inflation-adjusted mileage rates for 2026, offering taxpayers an efficient way to claim deductions for vehicle-related expenses incurred for business, charity, medical, or moving purposes. These adjustments reflect the continued economic shifts impacting car operation costs.
Effective January 1, 2026, the new standard mileage rates are established as follows:
- Business Travel: Increased to 72.5 cents per mile, inclusive of a 35-cent-per-mile depreciation allocation. This marks a rise from the 70 cents per mile rate set for 2025
- Medical/Moving Purposes: Reduced slightly to 20.5 cents per mile, down from 21 cents in the previous year, reflecting the variable cost considerations.
- Charitable Contributions: Consistent at 14 cents per mile, a fixed rate unchanged for over a quarter-century.
As is typical, the business mileage rate considers the integral fixed and variable costs of automobile operation. Meanwhile, the medical and moving rates remain contingent on variable expenses as determined by the IRS study.
It is critical to note that the One Big Beautiful Bill Act (OBBBA) held firm on disallowing moving expense deductions except for specific cases within the Armed Forces and intelligence community, marking a substantial shift since 2017.
When engaging in charitable work, taxpayers might opt for a direct expense deduction over the per-mile method, covering gas and oil costs. However, comprehensive upkeep and insurance costs are non-deductible expenses.
Business Vehicle Use Considerations: Taxpayers can alternatively compute vehicle expenses using actual costs, which might benefit from shifting depreciation rules, particularly through bonuses and first-year advantages. Keep in mind, however, reverting from actual cost calculations to standard rates in subsequent years is restricted, particularly per vehicle protocol and when exceeding four vehicles in concurrent use.
Additionally, parking, tolls, and property taxes attributable to business can be deducted independently of the general rate, an often-overlooked advantage by many business owners.
Tax Strategies for Employers and Employees: Reimbursements based on the standard mileage framework, providing the right documentation is in place, remain tax-free for employees. Meanwhile, the elimination and continued prohibition of unreimbursed employee deductions continue, with particular exceptions offered to qualified personnel across specific occupations.
Opportunities for Self-employed Individuals: Entrepreneurs remain eligible for deductions on business-related vehicle use via Schedule C, with potential to account for business-use interest on auto loans.
Heavy SUVs and Deduction Advantages: Heavier vehicles exceeding 6,000 pounds but under 14,000 pounds open opportunities for substantial tax deductions through Section 179 and bonus depreciation avenues. The lifecycle of such a vehicle bears implications on recapturing initially claimed deductions, urging cautious tax planning.
For professional guidance on optimizing your vehicle-related tax deductions and understanding their implications on tax strategies, contact our office in Coral Gables, Florida, where expert advice and strategic insights are just a call away.
Educator's Deduction Reform: Key Changes Under OBBBA
The One Big Beautiful Bill Act (OBBBA) introduces significant enhancements for educators' tax deductions starting in 2026, offering both strategic opportunities and planning considerations for educators who qualify. With the reinstated itemized deduction for qualified unreimbursed expenses, educators have a broader spectrum of financial relief. This is complemented by the retention of the $350 above-the-line deduction, allowing educators to maximize their tax benefits by selectively allocating expenses between these avenues.
Understanding the nuances of these changes is crucial for educators and financial advisors alike. The dual-option deduction strategy can potentially enhance tax efficiency, thereby aligning with broader financial planning goals.
At NR CPAs & Business Advisors, based in Coral Gables, Florida, our expertise in tax preparation and planning provides invaluable support to educators navigating these changes. Our comprehensive approach, combined with personalized advice from our experienced team, ensures compliance and optimization in line with the latest tax legislations.
Given these updates, it is imperative to engage with seasoned professionals to fully leverage your deduction strategies. Contact us today to streamline your tax planning under OBBBA's new guidelines and maximize your deductions for upcoming tax years.
