Everyone has a hobby – whether it’s collecting stamps or crafting! Some people also use their hobbies to generate income, for instance breeding dogs or horses. If you do receive income from your hobby, you must report it on your tax return, but the income you report is different than how you report income from a business. We’ve collected these 4 tips from the IRS to help guide you through earning income with your hobby:
- Define “business” vs. “hobby”. In a business, activity is done to make a profit. Conversely, an individual may have a hobby just for sport or fun. If you’re not sure which group you fall into, check these 9 factors to help you determine if you’re engaging in business, or if you have a hobby.
- Know your allowable hobby deductions. In some cases, you may be able to deduct ordinary and necessary hobby expenses. An “ordinary” expense is one that is common and accepted for the activity. A “necessary” expense is one that is helpful or appropriate. For the nitty-gritty, take a look at Publication 535.
- Limits on expenses. As a general rule, you can only deduct your hobby expenses up to the amount of your hobby income.
- Know how to deduct expenses. You must itemize deductions on your return in order to deduct hobby expenses. Costs may fall into three types of expenses, where special rules apply. See Publication 535 for more information.
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These free resources should not be taken as tax or legal advice. Content provided is intended as general information. Tax regulations and laws change and the impact of laws can vary. Consult a tax advisor, CPA or lawyer for guidance on your specific situation.