Basic Tax Information about Hobbies
Many people enjoy hobbies that may also be a source of income.
Some examples include stamp and coin collecting, craft making, and horsemanship, all of which the Internal Revenue Service pays special attention.
There are a number of rules that the IRS applies in determining if an activity is a business, or a hobby. If the activity is a business, then all normal business deductions apply, but if the activity is truly a hobby, then you may only deduct expenses against any income derived from that activity up to the amount of the income, but no more.
Whether you are involved in a hobby or a business, you are required to report all income derived from any hobby activity.
There are special rules and limits for deductions if the activity is a hobby.
Business or a Hobby?
One of the major issues in determining whether an activity is a business or a hobby is the intent of the owner, or operator of the activity. One of the more important factors is whether there is intent make a profit. Many often engage in a hobby for sport or recreation, not to make a profit, but for the enjoyment of the activity.
There are a number of factors that the IRS will consider in determining whether your activity is a hobby or a business, not the least of which as stated above, intent to make a profit, the time allocated to the activity, and conversely, other time not allocated to the endeavor, advertising, whether a business license exists, taxes that maybe paid or payable to any local government for the activity, business listings, and a myriad of other criteria indicating whether the intent of the individual involved in the activity is to be in business, or that the activity is merely a pleasurable pastime.
Allowable Hobby Deductions
Whether there is intent to produce a profit, within certain limits you can usually deduct ordinary and necessary hobby expenses.
An ordinary expense is one that is common for the activity.
A necessary expense is one that is appropriate for the activity.
Limits on Hobby Expenses
Generally if the activity is a hobby, or deemed to be so, you are allowed to deduct qualified hobby expenses up to the amount of income derived from the hobby activity. Should hobby expenses exceed hobby income, those expenses are not deductible against the activity or other income.
Our emphasis at Muffoletto & Company is to provide you the proper guidance and understanding of the system so that you avoid taxes to the extent that the law allows.
Should you have questions relating to these matters, tax, financial, and accounting issues, give us a call at (818) 346-2160.
You can also visit us on the web at www.petemcpa.com!