Doing and Deducting the Hobby You Love for Fun and Profit
Confucius said, “Choose a job you love, and you will never have to work a day in your life.” Many people take this to heart and develop their passion into a business venture. However, the IRS may disagree with you over whether your passion project is a business or a hobby.
The difference between a business and a hobby can be huge in terms of tax impact. If you take a loss in a business, you can deduct your losses to not only offset the income from that business, but also to offset income you earned elsewhere. If you take a loss in a hobby, you can only deduct losses if you itemize deductions on your personal income tax return, and then only to offset your earnings from that hobby business and only to the extent that the hobby losses and certain other deductible expenses exceeded 2% of your adjusted gross income.
The IRS looks at a number of factors to determine if an activity is a business or a hobby.
- Whether the activity has produced a profit in at least 2 of the last 5 years
- How much profit the activity makes
- Whether the losses you had are normal in the startup phase of this type of business or due to circumstances beyond your control
- Whether you adapt your methods of doing the activity to maximize profits
- Whether you carry on the activity in a businesslike manner, including maintaining thorough accounting records
- The amount of time and effort spent on the activity
- Whether you depend on the income from the activity for your livelihood
- Whether you seek and follow the advice of others with the knowledge needed to carry on the activity as a successful business
- Whether you made a profit in similar activities in the past
- Whether you expect a future profit
The fact is, hobbies can be expensive. I spend an exorbitant amount of money on yarn, sewing supplies, paint, and various other arts and crafts materials on a regular basis. It is very tempting to try to get some of that money back somehow. The IRS knows this and is on guard for improper deductions of hobby expenses. But if you can deduct some of those losses to offset what you made selling your craft projects, or better yet establish that your hobby is a business, you should absolutely take advantage of the opportunity to take appropriate deductions.
If you are running a knitting empire, suffering from “starving artist” syndrome, or just want to see if the cost of your materials and depreciation on your new table saw can offset the profit of the shelf you sold, call 717 771 7195 to schedule a consultation and see your options.