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Are you making money from your hobby?

Many people find enjoyment from hobbies, such as baking cakes, glass blowing, or crafting homemade jewelry. Some lucky folks even produce income from such hobbies.

Taxpayers must report income from hobbies on their individual tax returns. The rules on how to do so differ depending on whether the activity that produced the income is a business or a hobby.

Special hobby rules and limits for deductions exist. Consider the following at tax time:

  • Hobby or Business: The biggest difference between a business and a hobby is profit. The primary objective of a business is to make a profit while you pursue a hobby for sport or recreation, not solely motivated by business profit. Consider nine factors when distinguishing an activity as a hobby. Also make sure to base this determination of a business or hobby on all the facts and circumstances. See Publication 535, Business Expenses, for more about ‘not-for-profit’ rules.
  • Allowable Hobby Deductions: Within certain limits, you can usually deduct expenses that are both ordinary and necessary. An ordinary expense is common and accepted for the activity while a necessary expense proves helpful and appropriate for the activity – not necessarily indispensable.
  • Hobby Expense Limitations: Generally, you can deduct only expenses equaling the amount of the hobby’s income. If the expenses outnumber the income to generate a loss, you can’t, unlike other losses, deduct it from other income.
  • How to deduct hobby expenses: To deduct hobby expenses, you must itemize your deductions on your tax return. Expenses can fall into three categories and special rules apply to each category. Publication 535 delineates these rules to claim your expenses on Schedule A, Itemized Deductions.
  • Additional Resources you may find helpful:

We hope these tips help you save money on your favorite hobby at tax time. The proven tax accounting firm Patrick & Robinson CPAs has helped its clients save money on their taxes for decades.

Contact us at Office@CPAsite.com or (904) 396-5400.

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