Take note that if you receive income from a hobby that was not intended to be profitable, expenses paid out to conduct the activity are considered miscellaneous itemized deductions and cannot be deducted.
Fashioning clay into pottery, painting landscapes on canvas, photography, car restoration – all terrific hobbies. But if such activities are a source of pleasure and revenue, make no mistake about it…the income made must be reported on your tax return.
It can sometimes be difficult to differentiate between a pastime that is strictly for fun and one that generates enough revenue to define as a business. In fact, it’s not the amount of money a hobby makes in the eyes of the IRS, it’s more about a few other factors.
Are complete and accurate records kept? Is the time and labor put into the hobby intended to make it profitable? Is resulting revenue part of your livelihood? According to the IRS, if an activity has gross income for three or more of the previous five years that exceeds attributable deductions, then the activity is generally considered to be for-profit.
Then consider whether any losses associated with the activity are due to circumstances beyond your control or simply part of routine costs. Have you changed the way you conduct the activity in an effort to make it profitable or improve on its profitability? Do you have the information, knowledge and skill to turn this activity into a money-making business?
What also must be taken into account is whether you were financially successful in similar activities in the past. And here’s a particularly important factor – can you expect to make future profits from the appreciation of assets used in your current pastime?
All these factors must be examined to legitimately determine whether that “just for fun” diversion is more of a “nice financial sideline.”
Take note that if you receive income from a hobby that was not intended to be profitable, expenses paid out to conduct the activity are considered miscellaneous itemized deductions and cannot be deducted. And even if the profit was unintended, you still must report the income received on Schedule 1, Form 1040.
A tax professional can help you sort out the difference between a purely recreational hobby and one that crosses the line into a for-profit business.
Disclaimer: Any written tax content, comments, or advice contained in this article is limited to the matters specifically set forth herein. Such content, comments, or advice may be based on tax statutes, regulations, and administrative and judicial interpretations thereof and we have no obligation to update any content, comments or advice for retroactive or prospective changes to such authorities. This communication is not intended to address the potential application of penalties and interest, for which the taxpayer is responsible, that may be imposed for non-compliance with tax law.