Is it a business or a hobby?
There are many people who have skill sets that can become a source of income. This can be anything from glass blowing to wood working, baking cakes to catering and everything in between. No matter your passion, we have some tips for you on hobbies and paying taxes.
You must report any income earned to the IRS. How you report this income and expenses depend on how the job is labeled: Hobby or Business. There are special rules, limits, and deductions that taxpayers can claim for hobbies.
Here are some different things to consider:
- Is it a Business or a Hobby? This is the most important question you could ask yourself. Are you doing your craft to make a profit? People engage in a hobby for sport or recreation, not to make a profit. A CPA can help guide you in determining what you are considered. Check out this link for nine factors that help determine whether an activity is a hobby. Make sure to base the determination on all the facts and circumstances.
- Allowable Hobby Deductions. Hobbies have expenses. There are certain limits but you 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. It is important to keep track of all expenses and income. Typically, the amount of income you earn determines how much you can deduct for hobby expenses. If hobby expenses are more than its income, taxpayers have a loss from the activity—keep in mind that a hobby loss can’t be deducted from other income. **NOTE: the tax reform eliminates all miscellaneous itemized deductions previously subject to the 2% of AGI threshold. That includes hobby expenses. This means you can not write off hobby expenses from 2018-2025.
- How to Deduct Hobby Expenses. The most important thing you can do is to keep track of all your expenses throughout the year. There are many programs you can use to make it easy on yourself! You can also use an excel spreadsheet to track. Make sure to keep all your receipts. In order to deduct hobby expenses you need to itemize your deductions on your tax return.
As always we recommend using a CPA when filing your taxes for best results!