Marcy - The main difference between a hobby and a business is that business deductions can carry over from one year to the next and hobby ones can't. That means big cash expenses like barns and pens can only be partially deducted if you are a hobby farmer, but they can be deducted from several years income for a business farmer.

Another large difference is that hobby deductions are limited to hobby income: example, you pay $1200 for feed and pots and make $1100 from selling goats, chicks and veggies ... you end up with a net hobby income of ZERO and no deductions against any other income. If you made $1300 in the sales you would have a hobby income of $100 which gets taxed as if it were regular income.

If it had been a $100 business loss, you could have taken it off other income, such as salary, rents, or stock dividends.

Get yourself some recent books on small businesses - they make more sense than the IRS site because they have a better topic organization. And sit down and figure out what things are costing you and what they are bringing in. Figure out if you are up to acting like a businesswoman on this: all the record keeping has to be businesslike, you have to be really trying to make a profit, etc.

There is a serious disadvantage to declaring something a business: if you haven't made any money in about 5 years, the IRS can declare that it was a hobby all along and you end up paying the taxes and penalties.

http://www.businessknowhow.com/money/taxhobby.htm
http://www.irs.gov/irs/article/0,,id=186056,00.html