Many clergy(and their spouses) participate in activities(outside their main job) that create additional sources of income.  Is it a business or a hobby in the eyes of the IRS? The tax implications of that classification can vary greatly. Below are some questions to ask yourself when trying to determine if an activity is a business or a hobby.

  • Do you treat it like a business?
    • Are the funds for the activity in a separate bank account than your personal finances?
  • Knowledge of the activity
    • Do you have extensive knowledge in the activity that is being performed?
    • Knowledge of accepted business methods.
  • Time/Effort
    • Do you spend substantial time/effort on the activity?
    • Are you trying to make a profit?
  • Asset appreciation
    • The assets used in the activity may appreciate, causing there to be a profit.
  • Ability to turn a profit
    • If the activity is not currently profitable, have you shown a history of turning a profit with similar ventures?
  • History of profit/loss
    • Numerous years in a row with claiming losses may indicate that the activity is not actually a business but a hobby.
  • Gross Income Test
    • A business generally needs to have gross income at least 3 out of the 5 previous years to be classified as a business.
  • Financial picture
    • Do you have other sources of income or is this the sole income producing activity? This does not solely determine whether an activity is a business or hobby but it is a factory that helps clarify the determination.
  • Enjoyment test
    • If the activity generally isn’t something people would do for fun, then it may be more likely to be considered a business.

These is no one factor that goes into determining whether an activity is a business or a hobby. Although, combining the factors above should provide a little clarity on how the IRS the tax status of an activity that clergy are participating in.  

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Clergy Financial Resources serves as a resource for clients to help analyze the complexity of clergy tax law, church payroll & HR issues. Our professionals are committed to helping clients stay informed about tax news, developments and trends in various specialty areas.

This article is intended to provide readers with guidance in tax matters. The article does not constitute, and should not be treated as professional advice regarding the use of any particular tax technique. Every effort has been made to assure the accuracy of the information. Clergy Financial Resources and the author do not assume responsibility for any individual’s reliance upon the information provided in the article. Readers should independently verify all information before applying it to a particular fact situation, and should independently determine the impact of any particular tax planning technique. If you are seeking legal advice, you are encouraged to consult an attorney.

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