Five things to remember about hobby income and expenses
A taxpayer must report income on their tax return even if it is made from a hobby
From scrapbooking to glass blowing, 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 for how to report the income and expenses depend on whether the activity is a hobby or a business. There are special rules and limits for deductions taxpayers can claim for hobbies. Here are five things to consider:
Determine if the activity is a business or a hobby. If someone has a business, they operate the business to make a profit. In contrast, people engage in a hobby for sport or recreation, not to make a profit. Taxpayers should consider nine 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. For more about ‘not-for-profit’ rules, see Publication 535, Business Expenses.
Allowable hobby deductions. Taxpayers can usually deduct ordinary and necessary hobby expenses within certain limits:
Ordinary expense is common and accepted for the activity.
Necessary expense is appropriate for the activity.
Limits on hobby expenses. Taxpayers can generally only deduct hobby expenses up to the amount of hobby income. If hobby expenses are more than its income, taxpayers have a loss from the activity. However, a hobby loss can’t be deducted from other income.
Use IRS Free File. Hobby rules can be complex, and IRS Free File can make filing a tax return easier.
Remember that all of the web page addresses for the official IRS website, IRS.gov, begin with http://www.irs.gov. Don' t be confused or misled by Internet sites that end in .com, .net, .org or other designations instead of .gov. The address of the official IRS governmental Web site is http://www.irs.gov/.