Millions of people enjoy hobbies that are also a source of income. You may be a skydiving instructor, a piano or vocal teacher, a math tutor, a jewelry maker or distributor, or a stamp and coin collector. You must report on your tax return the income you earn from a hobby. The rules for how you report the income and expenses depend on whether the activity is a hobby or a business. There are special rules and limits for deductions you can claim for a hobby. Here are some tax tips you should know about hobbies:
1. Is it a Business or a Hobby? A key feature of a business is that you do it to make a profit. You often engage in a hobby for sport or recreation, not to make a profit. Before deciding whether your activity is a business or hobby, there are nine factors to consider.
2. Allowable Hobby Deductions. Within certain limits, 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.
3. Limits on Hobby Expenses. Generally, you can only deduct your hobby expenses up to the amount of hobby income. If your hobby expenses are more than your hobby income, you have a loss from the activity. You can’t deduct the loss from your other income.
4. How to Deduct Hobby Expenses. You must itemize deductions on your tax return in order to deduct hobby expenses. Your expenses may fall into three types of deductions, and special rules apply to each type. See Publication 535 for the rules about how you claim them on Schedule A, Itemized Deductions.
For more on these rules see Publication 535.
Additional IRS Resources:
- Publication 525, Taxable and Nontaxable Income
- Publication 529, Miscellaneous Deductions
- Publication 17, Your Federal Income Tax Guide
- IRC Section 183 : Activities Not Engaged in For Profit (Audit Technique Guide) – details on the factors to determine ‘for profit’ or ‘not-for-profit’
