Disclaimer: I’m not a tax expert. This article is provided for general information. For more details visit the IRS online.
One of the perks of having a home business are the tax deductions. But if your hobby generates a little income, you may be eligible for deductions as well. The key is knowing the IRS’s definition of a business versus a hobby. If you do your hobby with the intention of making money, then its actually a business. However, if your hobby is simply a pleasurable activity that sometimes makes money, then it is classified as a hobby.
When it comes to deductions, both businesses and hobbies can take them, but hobbies are limited in how much they can take. The IRS only allows deductions up to the amount the hobby earned. If you made $1,000 with your hobby and your expenses were $1,500, you can only deduct up to $1,000. Hobbies are not allowed to show a loss whereas a business can deduct all business-relates expenses even if it results in a loss (within reason).
To deduct your hobby expenses:
1. Make sure your project is indeed a hobby and not a business. Remember, if your focus is to make money then its a business.
2. Keep track of all your hobby related expenses such as the cost of materials. File all your receipts and statements to verify your expenses.
3. Keep records of your income.
4. Use Schedule A of your 1040 for file your deductions. (Businesses use Schedule C).
5. In a business, work to show a profit. The IRS will accept business losses only for so long.
To learn more about hobby deductions, read the IRS’s Publication 535, the section on Not-For-Profit Activities.
Good information. Keep in mind that if you do not show a “profit” within a 5 year period you will not be able to claim all the expenses. Definetly contact an account or tax consultant.
You’re right. You need to be working to make a profit and you only have so long to make that happen. I definitely recommend hiring an expert. Thanks for posting.