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Hobbies and taxes – when your pastime generates income

Did you know that if you make money from your hobby you are required to report it on your tax return?  Here are some facts about hobbies:

Business or Hobby?

First of all, how do you tell if your activity is a business or a hobby? The main feature of a hobby is that you do it for recreation, not to make a profit. But you should consider other factors and ask yourself the following questions:

  1. Do you perform the activity in a businesslike manner?
  2. Do you put in enough time and effort to indicate that you intend to make it profitable?
  3. Do you depend on the income for your livelihood?
  4. Are your losses due to circumstances beyond your control, or are they normal in the course of the activity?
  5. Do you change your methods to improve your profitability?
  6. Do you or your advisors have the knowledge necessary to carry on the activity as a successful business?
  7. Have you been successful in making a profit in similar activities in the past?
  8. Does your activity make a profit in most years? And how much does it make?
  9. Do you expect to be profitable in the future from appreciation of assets used in the activity?

If you are unsure whether your activity is a business or a hobby you should consult your tax advisor to discuss your unique situation.

Hobby Expenses

Even if you are engaged in a hobby activity you are allowed to deduct ordinary and necessary expenses.  This means the expenses must be regular and appropriate for the activity.  You are only allowed to deduct hobby expenses up to the amount of your hobby income.  If you have more expenses than income, you are not allowed to deduct the loss from your other income. Also you must itemize deductions on your tax return to deduct your hobby expenses as they are reported on Schedule A of your tax return.

 

If you have additional questions about hobby activities please consult your tax preparer.

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