Hobby versus Business Activities - If you are on the fence as to whether to classify your activity as a business or a hobby, it’s important to understand the differences as well as the reporting requirements relative to hobby activities:
- Is it a Business or a Hobby? A key feature of a business is that people engage in it to make a profit. Consider nine factors when determining whether an activity is a hobby or a business. Make sure to base the determination on all the facts and circumstances.
- Allowable Hobby Deductions. Within certain limits, taxpayers 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. Generally, taxpayers can 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 isn’t allowed to offset other taxpayer income.
- How to Deduct Hobby Expenses. Taxpayers must itemize deductions on their tax return to deduct hobby expenses. Expenses may fall into three types of deductions, and special rules apply to each type. See Publication 535 for the rules about how to claim them on Schedule A, as Itemized Deductions.
Please contact us if you’d like to discuss whether your activity more resembles a “hobby” as compared with a business activity. Mike and Staff