What Is the Trade or Business Continuity and Regularity Test?

The trade or business continuity and regularity test comes from the Supreme Court’s 1987 decision in Commissioner v. Groetzinger, and it is one half of the two-part standard the IRS uses to decide whether your activity is a real business or something else. To qualify as a trade or business, you must be involved in the activity with continuity and regularity, and your primary purpose must be income or profit. A sporadic activity, a hobby, or an amusement diversion does not qualify.¹ Continuity and regularity is the prong that asks whether your work has the rhythm of an occupation. Profit motive is the prong that asks why you are doing it. Both must be present.

Where the Test Comes From

Robert Groetzinger spent 60 to 80 hours a week studying racing forms and placing parimutuel wagers on dog races. He had no other job, kept detailed daily records of wins and losses, and went to the track six days a week for 48 weeks straight. The Supreme Court held that his gambling was a trade or business, and in doing so it distilled the standard to a single sentence that still governs today: continuity and regularity of involvement, with a primary purpose of income or profit.²

The two prongs work together. Profit motive alone is not enough if the work is sporadic. Regular activity is not enough if the primary purpose is personal enjoyment.

What Continuity and Regularity Actually Means

There is no bright-line hour count in the statute and no minimum number of transactions. The IRS and the courts look at the overall pattern of how you conduct the activity. Groetzinger’s 60-to-80-hour weeks made his case easy, but you do not need to work full time for your activity to qualify. What matters is whether the work resembles the rhythm of a real occupation rather than something done when the mood strikes.

Several concrete indicators help establish the pattern:

A consistent weekly or monthly schedule of operations signals regularity.
A steady volume of transactions spread across the year, rather than clustered into a single burst, demonstrates continuity.
Ongoing activity between revenue events, such as marketing, client outreach, bookkeeping, and equipment maintenance, shows you are running an operation and not just executing occasional jobs.

A freelance graphic designer who takes on clients year-round and invoices monthly looks very different from someone who designs a logo for a friend’s startup once every couple of years. The designer has a practice. The other person did a favor.

Seasonal Work Still Counts

Seasonal businesses do not automatically fail this test. A landscaper who works intensively from April through October but shuts down for winter still operates with regularity during the active season, and the off-season likely fills with equipment maintenance, bookkeeping, and marketing. The IRS expects to see the normal ebb and flow of a commercial operation within whatever timeframe is typical for the industry. What raises flags is true intermittence: claiming business status while only performing work during a single short stretch once a year, with nothing related happening in between.

Records That Support Your Position

The burden of proof falls on you to show that your involvement was more than occasional. You do not need elaborate systems. A simple spreadsheet listing dates, hours, and tasks can be decisive in an audit. Separate bank accounts, invoices, mileage logs, and a written schedule of when you work all build the same picture. The point is to have contemporaneous evidence that your activity had a steady pattern, not a reconstruction assembled after the IRS asks.

The Profit Motive Prong That Rides Alongside

Continuity and regularity is only half the test. The other half asks whether your primary purpose is to earn money. You do not need to actually turn a profit in any given year, and you can operate at a loss for extended periods during a startup phase. The question is whether you entered the activity with a good-faith expectation of eventually making money and whether your conduct reflects that expectation.

Courts look past what you say and examine what you do. A taxpayer who adjusts methods after losing money, seeks professional advice, keeps accurate financial records, and treats the activity the way a reasonable businessperson would demonstrates profit motive through behavior. Someone who runs persistent losses year after year without changing anything, while clearly enjoying the activity as a hobby, has a much harder case.

Personal enjoyment does not disqualify you. The Treasury Regulations explicitly recognize that an activity will not be treated as a hobby merely because the taxpayer has motivations beyond profit.³ A professional photographer who genuinely loves photography still qualifies if profit is the primary purpose and the other indicators line up. The concern arises when pleasure is clearly the driving force and the business label is a vehicle for deducting personal expenses.

The Three-of-Five-Years Safe Harbor

Section 183(d) creates a useful presumption. If your activity produces a profit in at least three out of five consecutive tax years ending with the current year, the IRS presumes you are engaged in the activity for profit. That shifts the burden to the IRS to prove otherwise. For activities that primarily involve breeding, training, showing, or racing horses, the window is two profitable years out of seven.⁴

How the IRS Evaluates Your Activity When It Pushes Back

When the profit presumption does not apply, or when the IRS challenges your status despite it, the agency turns to a nine-factor analysis in Treasury Regulation 1.183-2(b). No single factor is decisive, and the regulation warns against treating this as a checklist where you need a majority. The IRS weighs everything together.³ The nine factors:

How you run the activity, including books, records, separate accounts, and willingness to change methods to improve profitability.
Your expertise, including study before starting and consultation with experts.
Time and effort spent, especially personal time devoted to work that lacks recreational appeal.
Expected appreciation of assets used in the activity, such as land.
Your track record turning similar ventures profitable.
History of income and losses, with startup losses expected but persistent losses concerning.
Occasional profits, viewed in relation to the size of losses and the investment.
Your other income, particularly when losses conveniently offset high wages.
Elements of personal pleasure or recreation.

The practical takeaway: the more your activity looks and operates like a real business from the outside, the stronger your position. Professional records, a written business plan, marketing efforts, and a willingness to change course when something is not working all carry real weight.

What Passing or Failing the Test Changes on Your Return

The classification controls a lot. If you qualify as a trade or business and operate as a sole proprietor, you report income and expenses on Schedule C. The Schedule C instructions mirror the Groetzinger standard: income or profit as the primary purpose, and involvement with continuity and regularity.⁵ You can deduct ordinary and necessary business expenses under Section 162, and eligible taxpayers can claim up to a 20% qualified business income deduction under Section 199A.⁶

If your net earnings from self-employment reach $400 or more, you owe self-employment tax and file Schedule SE.⁷ The rate is 15.3%, and you can deduct half as an above-the-line adjustment to income.⁸

Failing the test is expensive. Under Section 183(a), if your activity is not engaged in for profit, no deductions attributable to it are allowed except as specifically provided in the statute.⁴ Taxpayers used to deduct hobby expenses as miscellaneous itemized deductions up to the amount of hobby income. The Tax Cuts and Jobs Act suspended that ability starting in 2018, and later legislation made the elimination permanent. You cannot deduct any hobby expenses at all.

You still report every dollar of hobby income. It goes on Schedule 1 (Form 1040), line 8j, labeled “Activity not engaged in for profit income.”⁹ So you pay tax on the full revenue without subtracting the costs you incurred to earn it. Spend $15,000 on materials and earn $18,000 in sales, and you pay tax on $18,000, not $3,000. The only narrow exception is that hobbies involving the sale of goods may still subtract cost of goods sold. Hobby income does not trigger self-employment tax, but it also does not qualify for the QBI deduction.

That lopsided treatment is the reason the continuity and regularity test matters in practice. Meeting it, alongside the profit motive prong, is what separates deductible business operations from taxable revenue with no offsets.

1
Legal Information Institute. Commissioner v. Groetzinger, 480 U.S. 23
2
Justia Law. Commissioner v. Groetzinger, 480 U.S. 23
3
eCFR. 26 CFR 1.183-2 – Activity Not Engaged in for Profit Defined
4
Office of the Law Revision Counsel. 26 USC 183 – Activities Not Engaged in for Profit
5
Internal Revenue Service. Instructions for Schedule C (Form 1040)
6
Office of the Law Revision Counsel. 26 USC 199A – Qualified Business Income
7
Internal Revenue Service. Self-Employment Tax (Social Security and Medicare Taxes)
8
Internal Revenue Service. Topic No. 554, Self-Employment Tax
9
Taxpayer Advocate Service. Hobby vs. Business Income