From scrapbooking to glass blowing, many Americans enjoy hobbies that are
also a source of income. A taxpayer must report income on their tax return even
if it is made from a hobby.
However, the rules for how to report the income and expenses depend on
whether the activity is a hobby or a business. There are special rules and limits
for deductions taxpayers can claim for hobbies. Here are five things to
consider:
- Determine
if the activity is a business or a hobby. If someone has a
business, they operate the business to make a profit. In contrast, people
engage in a hobby for sport or recreation, not to make a profit. Taxpayers
should consider nine
factors when determining whether their activity is a business or a
hobby, and base their determination on all the facts and circumstances of
their activity. For more about ‘not-for-profit’ rules, see Publication
535, Business Expenses.
- Allowable
hobby deductions. Taxpayers can usually deduct ordinary and necessary
hobby expenses within certain limits:
- Ordinary expense is common
and accepted for the activity.
- Necessary expense is
appropriate for the activity.
- Limits
on hobby expenses. Taxpayers can generally only deduct hobby expenses up
to the amount of hobby income. If hobby expenses are more than its income,
taxpayers have a loss from the activity. However, a hobby loss can’t be
deducted from other income.
- How
to deduct hobby expenses. Taxpayers must itemize deductions on their tax
return to deduct hobby expenses. Expenses may fall into three types of
deductions, and special rules apply to each type. See Publication
535 for the rules about how to claim them on Schedule
A, Itemized Deductions.
- Use
IRS Free File.
Hobby rules can be complex, and IRS
Free File can make filing a tax return easier.
Additional IRS
Resources:
- Publication
525, Taxable and Nontaxable Income
- Publication
529, Miscellaneous Deductions
- Publication
334, Tax Guide for Small Business
- Publication
17, Your Federal Income Tax
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