In the last post, we discussed the factors used to determine if the activity in which you are engaged is a hobby or a business. To read that post, click https://affordablebookkeepingandpayroll.com/hobby-really-business/. Today we’re going to discuss how to take deductions on your tax return if it’s deemed the activity is truly a hobby and not a business.
If an activity is not for profit, losses from that activity may not be used to offset other income. An activity produces a loss when related expenses exceed income. The limit on not-for-profit losses applies to individuals, partnerships, estates, trusts, and S corporations.
If you earn income from your hobby, it must be reported on your tax return, but it can be offset by expenses incurred. Here are tax tips you need to know about hobby deductions:
- 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.
- 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.
- 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.
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- Deductions that a taxpayer may claim for certain personal expenses, such as home mortgage interest and taxes, may be taken in full.
- Deductions that don’t result in an adjustment to the basis of property, such as advertising, insurance premiums, and wages, may be taken next, to the extent gross income for the activity is more than the deductions from the first category.
- Deductions that reduce the basis of property, such as depreciation and amortization, are taken last, but only to the extent gross income for the activity is more than the deductions taken in the first two categories.
If you have questions about how your hobby expenses may affect your tax return, contact your CPA to discuss.
