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June 22, 2017
Many of us have hobbies that generate some sort of income, from woodworking, to photography, baking, homemade crafts, and many others. For the luckiest of us, our passions turn into businesses. But just because our hobby earns some money doesn’t qualify it as a business in the eyes of the IRS.
Income and expenses from both hobbies and businesses must be reported on your income tax return, but are treated differently. Fortunately, the IRS offers guidance on what qualifies as a business versus what is a hobby, as well as how to treat income from each.
Here are some tax tips to consider for your business or hobby:
1. A key feature of a business is that people do it for the purpose of making a profit. People engage in a hobby for sport or recreation, but not necessarily to earn a profit. There are nine specified guidelines to assist in making the determination if your activity qualifies as a business or a hobby. Some of these are:
Keep in mind that these are only guidelines, and each activity you engage in needs to be evaluated in the total context of your personal situation.
2. Within certain limits, you can usually deduct hobby expenses. The expenses must be necessary and ordinary to the hobby. Generally speaking, hobby expenses can be deducted from your taxes up to the amount of income you have from the hobby. Any expenses from a hobby in excess of the income cannot be deducted.
3. To deduct hobby expenses, you must itemize your deductions.
If you need assistance in making a determination of business versus hobby for one of your activities, please contact us. We can help evaluate your situation and assist you in making a decision if you have a hobby or a business.