Hobbies can be a great source of fun and recreation, and they can also be a source of income. Whether it’s making art, arranging flowers, or baking muffins, taxpayers must report any money they make on their tax return.
Business Or Hobby?
The rules governing the reporting vary, depending on whether the activity is actually a business or a hobby (a business is operated solely for profit, a hobby is engaged in primarily for pleasure or recreation.) If you’re not sure where your activity falls, these questions can help.
Only expenses that are “ordinary and necessary” may be deducted. Ordinary is defined as an expense common and accepted for the hobby, and necessary expenses are those deemed appropriate for the activity. Muffin ingredients and the electricity to run the oven qualify, as do packaging materials.
Unlike a business, taxpayers can usually only deduct hobby expenses up to the amount of hobby income. If a hobby’s expenses exceed its income, the loss can’t be deducted from other income. If you made $3,000 selling muffins, but your expenses were $4,000, only the $3,000 is deductible as expenses.
Prepared To File
Taxpayers claiming hobby expenses must itemize deductions (not claim the standard deduction) on Schedule A (Form 1040). It can be helpful to plan ahead for this, as hobby rules are complex and expenses may fall into three different categories, with different rules applied to each category. A tax professional can help you be prepared to file next year’s tax return.