People often want to know – can I deduct the expenses incurred from my hobby from my taxes?
Now, I’m not saying you don’t have to pay taxes, but when you first start out, as much as you hope to make a good income, you aren’t sure that will happen. At the end of the year, if you feel that you made a profit, YES you are required to pay taxes.
Previously, a taxpayer was able deduct expenses related to a hobby up to the amount of hobby income. After the Tax Cuts and Jobs Act of 2017, any expenses related to a hobby are no longer allowed to be deducted, even if you earned money from your hobby.
Now, you may be thinking that is unfair, but consider that the new rules allow an automatic deduction increase from $6,000 to $12,000 per individual. If you’re accruing $12,000 in deductions, you out to be filing as a business anyway to take advantage of all the allowable business deductions.
The IRS usually considers you in an activity for profit if you’ve made a profit for three of the past five years. The IRS pays attention to businesses that have several years’ worth of losses. Expenses, and losses, are deductible just for activities classified as a trade or business. The difference is especially important when expenses are high and losses start mounting up year after year. so you want do all you can to be sure your “businesses” doesn’t end up being considered to be a hobby.
So, if you are making a profit, it seems to me it will be better to file as a business rather than a hobby. For this reason, it will be critical to retain ALL receipts you acquire in the course of your hobby/business.
To further clarify...
Generallly, the IRS assumes that if you’ve made a profit in three of the past five years, you’ve got a “profit motive.” If you haven’t made a profit in three of the past five years, you’ll find yourself having to establish that you actually have a profit motive in which your business losses were attributed to circumstances beyond your control.
The IRS and Tax Court will use these nine factors to determine whether an activity is a business or a hobby.
Keep in mind that there are simple factors which the IRS applies each of these factors specifically for every person’s situation. For help to further evaluate your circumstances, see your tax advisor.
How does one keep it up the activity – “businesslike” operations with detailed books and records, or more informally?
- How does one document the – “businesslike” operations – with detailed books and records, or more informally?
- What’s your level of experience , or your advisor’s expertise, within the business or industry?
- What proportion time and energy does one spend on the activity?
- What’s your expectation that assets you employ within the activity may appreciate in value?
- What successes have you ever had in other business activities?
- What’s your history of income or losses from the activity?
- What proportion in occasional profits does one earn, if any?
- What are all of your other income sources?
- Does the activity entail personal pleasure or recreation?
In addition to demonstrating your professional approach to your business, records and receipts can help document your profit motive. A written business plan is often a prerequisite for indicating an intent for profit, and it can also show ways in which you are modifying your business to cope with losses.