Millions of people enjoy hobbies that are also a source of income. From
catering to cupcake baking, crafting homemade jewelry to glass blowing -- no
matter what a person’s passion, the Internal Revenue Service offers some tips
on hobbies.
Taxpayers must report on their tax return the income earned from hobbies.
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 tax tips to consider:
- Is
it a Business or a Hobby? A key feature of a business is that people do it
to make a profit. People engage in a hobby for sport or recreation, not to
make a profit. Consider nine
factors when determining whether an activity is a hobby. Make sure to
base the determination on all the facts and circumstances. For more about
‘not-for-profit’ rules, see Publication
535, Business Expenses.
- Allowable
Hobby Deductions. Within certain limits, taxpayers can usually deduct
ordinary and necessary hobby expenses. An ordinary expense is one that is
common and accepted for the activity. A necessary expense is one that is
appropriate for the activity.
- Limits
on Hobby Expenses. Generally, taxpayers can 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. IRS Free File is
available until Oct. 16. Taxpayers earning $64,000 or less can use
brand-name tax software. Those earning more can use Free File Fillable
Forms, an electronic version of IRS paper forms. Free File is available
only through the IRS.gov website.
Additional IRS
Resources:
- Publication
525, Taxable and Nontaxable Income
- Publication 529, Miscellaneous Deductions
- Publication 17, Your Federal Income Tax
No comments:
Post a Comment