Four Things to Remember about Hobby Income and Expenses

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 on how to report the income and expenses depend on whether the activity is a business or a hobby.  There are rules and limits on deductions for taxpayers claiming on hobby activities. The following four things should be taken into consideration and remembered:

  • Determine if the activity is a business or a hobby.  A Business is operated to make a profit. In contrast, a hobby for sport or recreation is not to make a profit. Taxpayers should consider the IRS 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. These factors are:

“In making the distinction between a hobby or business activity, take into account all facts and circumstances with respect to the activity. No one factor alone is decisive. You must generally consider these factors in determining whether an activity is a business engaged in making a profit:

        • Whether you carry on the activity in a businesslike manner and maintain complete and accurate books and records.
        • Whether the time and effort you put into the activity indicate you intend to make it profitable.
        • Whether you depend on income from the activity for your livelihood.
        • Whether your losses are due to circumstances beyond your control (or are normal in the startup phase of your type of business).
        • Whether you change your methods of operation in an attempt to improve profitability.
        • Whether you or your advisors have the knowledge needed to carry on the activity as a successful business.
        • Whether you were successful in making a profit in similar activities in the past.
        • Whether the activity makes a profit in some years and how much profit it makes.
        • Whether you can expect to make a future profit from the appreciation of the assets used in the activity.”
  • Allowable hobby deductions (within certain limits):
    • Ordinary expense is common and accepted for the activity.
    • Necessary expense is appropriate for the activity.
  • Limits on hobby expenses: only deduct hobby expenses up to the amount of hobby income. If hobby expenses are more than its income is a net loss; however, a hobby loss can’t be deducted from other income.
  • How to deduct hobby expenses:   Taxpayers must deduct the hobby deductions as itemize deductions on their tax return. 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.  (SOURCE: