Hobbies are a great way to relax, blow off some steam, and channel your creativity. Some hobbies can be pretty expensive, though. Collecting antiques, making fine jewelry and photography are just some examples of hobbies where the financial investments can add up.
If your pastime is costing you big bucks, it would be great to be able to deduct some of those expenses from your taxes. Unfortunately, you can't. Hobbies are activities you engage in that are not for profit. No profit, no deductions.
If you earn some money from your side projects though, you may be able to claim your hobby expenses as miscellaneous itemized deductions on IRS Schedule A on your 1040 tax form [source: Fishman]. Income could be anything from selling your handmade crafts and prints of your photography to antiques you've collected. On your taxes, you can claim deductions up to the amount you earned that year. And, the IRS only allows deductions that exceed 2 percent of your adjusted gross income. In some cases, your expenses might not even be high enough to go over the deductibility threshold anyway.
Here's an example. Suppose your adjusted gross income for the year is $100,000 and you have no other miscellaneous itemized deductions. Your photography hobby brought in an income of $10,000, but your expenses were $5,000. In this case, you can only write off $3,000 of expenses. The $3,000 is the difference between expenses minus the 2 percent of your income (2 percent of $100,000 is $2,000) [source: Fishman].
If your hobby is something that actually ends up making you a lot of money, you might want to turn your thinking around to "business." Then you can start deducting the losses from your taxes.
Uncle Sam is pretty strict about what's a business and what's a hobby. The primary test is the profit test. If you earn money on your activity for three out of five years, the IRS typically determines you have a business and not a hobby, and you can deduct your taxes accordingly [source: Konrad].
Your hobby also turns into a business in the eyes of the IRS depending on certain criteria, including [source: Bell]:
- Whether you perform your activities in a businesslike manner (keeping professional records, marketing your business)
- Whether you depend on the business for your livelihood
- How much effort you devote to it
- If your losses are normal for the business you're running
- If you're getting more out of the business than simply personal pleasure
If you begin deducting expenses as a business instead of a hobby, use the Schedule C tax form instead of Schedule A. And of course, it's imperative to keep good records of your hobby expenses as well as any income and losses. Working with a trusted tax advisor is the best way to keep things straight.
One thing to remember is that you have a hobby because you love doing it. If you're thinking of making the leap from hobby to business simply to save some tax money, ensure the thing you enjoy doing doesn't turn into a daily grind.
- Bell, Kay. "Make your hobby pay for itself." Bankrate. 2014. (Sep. 27, 2014) http://www.bankrate.com/finance/money-guides/turning-hobby-into-business-means-tax-breaks.aspx
- Fishman, Stephen, J.D. "Can You Deduct Your Expenses From a Hobby?" Nolo. 2014. (Sep. 27, 2014) http://www.nolo.com/legal-encyclopedia/can-you-deduct-your-expenses-from-hobby.html
- Konrad, Walecia. "Can You Write Off Your Hobby on Your Taxes?" Next Avenue. Mar. 27, 2012. (Sep. 27, 2014) http://www.nextavenue.org/article/2012-03/can-you-write-your-hobby-your-taxes
- Wood, Robert W. "Ten Tips For Deducting Your 'Hobby'." Forbes. Jan. 8, 2010. (Sep. 27, 2014) http://www.forbes.com/2010/01/08/irs-tax-audit-hobby-losses-personal-finance-robert-wood.html