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Many people enjoy hobbies that are also a source of income. From painting and pottery to scrap booking and soap making, these activities can be sources of both fun and finances. Taxpayers must ask themselves if their hobby is a recreational pursuit or a profit-making endeavor. Earning a living doing something you love is a natural goal, but you must be clear about your intentions to claim expenses come tax time.

If someone has a business, they operate the business to make a profit. In contrast, people engage in a hobby for sport or recreation, not to make a profit. Taxpayers should consider different factors when determining whether their activity is a business or a hobby. They should base their determination on all the facts and circumstances of their activity.

Allowable hobby deductions.

Taxpayers can only deduct ordinary and necessary hobby expenses:

  • Necessary expense is appropriate for the activity. Such expenses help you develop the skills your hobby requires, like attending a quilting class.
  • Ordinary expense is common and accepted for the activity, such as fabric and thread for a quilter.

Limits on hobby expenses.

Taxpayers can generally only deduct hobby expenses up to the amount of hobby income. If hobby expenses are more than its income, taxpayers have a loss from the activity. However, a hobby loss can’t be deducted from other income.

How to deduct hobby expenses.

Taxpayers must itemize deductions on their tax return to deduct hobby expenses. Keep records if the hobby becomes for of a business then a recreational pursuit. Taxpayers can look into this now to determine if they will itemize their deductions when they file their 2019 tax return next year. Expenses may fall into three types of deductions, and special rules apply to each type.

More Information:

IRSTaxTip: Tips for taxpayers who make money from a hobby.

References: IRS Tax Tips 2019-85, July 1, 2019