Distinction Between Doing Business and Pursuing a Hobby
The distinction between doing business and pursuing a hobby is often not fully clear. It is crucial, however, because engagement in activities can obtain various classifications under tax law. According to the Federal Court, there are two elements that decide whether you do business or not: appropriateness of profit and pursuit of profit. Nonetheless, each case has to be assessed individually.
Differentiating Indicators and Definitions
It is often not so easy to make a distinction between doing business and pursuing a hobby. It is so because, contrary to doing business, the primary intention of pursuing any hobby is not gaining income but rather acting for personal reasons or out of personal interests. Under tax law, finding the difference is relevant, however, because no proceeds from a hobby are subject to taxation. On the other hand, no losses may be deducted from taxable income.
The following indicators help tell the difference: Recording losses year after year suggests that you pursue a hobby. However, if, taking into account all the circumstances, some profit can be expected in the long run, you do business. Nonetheless, not only these indicators should be used and each case should be assessed individually. The Federal Court has based its argument on two criteria: appropriateness of profit and pursuit of profit. Appropriateness of profit implies the general suitability of an activity for yielding a profit. For instance, gathering and trading in rare post stamps is intended for that, whereas gambling at a casino is not. Pursuit of profit means that you seriously seek to make profit. Only those who are seriously committed to an activity and expend the necessary time and effort for that can be said to pursue profit.
Making a Distinction If You Run a Farm
On 3 August 2018 the Federal Court decided case 2C_548/2018, where, instead as (additional) self-employment, running a farm had been classified by tax authorities as pursuit of a hobby. Residing in the canton of Aargau, the taxpayer had been employed as a full-time mechanic. In addition, he had run a farm, which, until 2011, had been classified as self-employment. For 2011, the taxpayer had reported an operational loss of CHF 66,625. The competent tax committee had not approved it and unexpectedly reclassified running a farm as a hobby, which had resulted in rendering the business property private. This operation had yielded a liquidation gain of CHF 81,107, resulting from the total of allowable deductions from the business assets, which had been made as commercially reasonable so far, less social insurance contributions. Having lost several times before lower courts, he had brought the case before the Federal Court, where he argued that the operational loss of CHF 66,625 had not been set off and the liquidation gain of CHF 81,107 had been forfeited.
The Federal Court upheld the view of the previous court whereby it should be assumed that the 2011 activity consisted rather in pursuing a hobby than doing business as the farm should be denied being considered as bringing appropriate profit (objective aspect of self-employment) or pursuing profit at all (subjective aspect). The full-time employed taxpayer had not had enough time to take care of the farm business as a profession. The fact that the taxpayer, in the controversial year of 2011, made a turnover of just CHF 6170 as a fruit and plant grower was also taken into account to support the view of the judges. The Federal Court also said no to the deductibility of business losses because no business activity has been conducted. An allegedly positive cashflow does not make any difference here because what is crucial for the taxation of the self-employed is the income seen as such under commercial law, and in the 2011 tax return it was reported to be negative.
Do you have any innovative business idea you would like to make come true? Use STARTUPS.CH experts to become self-employed.
» Startups Scene» Found online