The One Big Beautiful Bill Act (OBBBA) has made one thing clear for 2025: if your hobby earns income, the IRS is watching. The act permanently extends a rule from the Tax Cuts and Jobs Act that bans most itemized deductions for hobby expenses.

That’s bad news for dog breeders, artists, and anyone earning side income from a passion project.
Why? Because while your income is fully taxable, your related expenses aren’t unless your activity qualifies as a business.

The good news: you can still structure your activity to be recognized as a legitimate business and regain your valuable deductions.

Why It Matters

If the IRS labels your activity a hobby, you lose key tax benefits. You’ll still report income (on Schedule 1, line 8j), but you won’t be able to deduct normal expenses like materials, travel, or advertising, except for limited inventory costs.

For example:
A dog breeder who sells puppies must report all sales income. But unless the operation qualifies as a business, only direct costs like food and care for the puppies can offset that income. Everything else becomes nondeductible.

The Business Escape: Prove Your Profit Motive

The IRS distinguishes a hobby from a business based on your intent to make a profit.
If your primary purpose is earning money, your activity qualifies as a business even if you show losses in some years.
It can be full-time or part-time. What matters is that you treat it professionally and work at it regularly.

Two Ways to Qualify as a Business

1️⃣ The “Three-of-Five” Safe Harbor Rule

If you earn a profit in three of five consecutive years, the IRS presumes you’re operating for profit. That’s an automatic advantage unless they can prove otherwise.
Keep in mind that this presumption starts with your third profitable year and covers the five-year window beginning with your first profitable year.

Example:
If you began breeding dogs in 2021 and turned a profit in 2022, 2024, and 2025, the IRS must presume your activity is a business for 2025 and 2026.

2️⃣ The Facts and Circumstances Test

If you haven’t met the three-year profit rule, you can still prove your case through your business practices.
The IRS considers nine key factors, including:

Recordkeeping: Do you keep detailed financial and operational records?
Expertise: Do you or your advisors have training in your field?
Effort: Do you spend consistent time running the activity?
Marketing: Are you actively trying to sell your products or services?
Profit Potential: Is there evidence your assets or products increase in value?

You don’t need to meet all nine factors, but acting like a business owner in most of them helps your case dramatically.

Smart Moves to Strengthen Your Case

✅ Keep separate bank accounts and use professional bookkeeping.
✅ Maintain records, receipts, and a written business plan.
✅ Obtain necessary licenses or permits.
✅ Actively market your activity (website, social media, client outreach).
✅ Combine your activity with related income sources, such as grooming, teaching, or product sales, to show diversification and business intent.

Real Example: Turning Passion into Proof

A couple in Hawaii who bred and groomed championship poodles showed the IRS they were serious. They kept meticulous records, hired professional handlers, attended seminars, and advertised nationally. Despite early losses, their consistent effort and professionalism convinced the Tax Court to recognize their operation as a business.

The Takeaway

The OBBBA’s changes make it tougher for hobby earners to claim deductions, but not impossible.
Operate like a professional, document your intent to make money, and you can still enjoy the same tax advantages as any small business.

At Brothers Tax, we help you protect your income and deductions with real-world strategies designed for passion-driven professionals.

Have questions about whether your activity qualifies as a business?
Contact our team at Brothers Tax for personalized advice.