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Is It A Business or a Hobby?

Has your hobby become more than a pastime? Are you making a profit? Confused about what you can and can’t deduct when it comes to hobby-related expenses and losses?

As a rule, any income you earn from a hobby must be reported on your tax return. However, how you report the income and any associated expenses depend on whether the activity is a hobby or a business.

To make a determination about your tax situation as a hobbyist, consider the following guidelines from the IRS:

  1. Is it a Business or a Hobby? A key feature of a business is that it’s operated for-profit. You often engage in a hobby for sport or recreation, not to make a profit. The IRS considers nine factors to help you determine whether your activity is a hobby. Make sure to base your determination on all the facts and circumstances of your situation.
  2. Allowable Hobby Deductions.  Within certain limits, you can usually 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 appropriate for the activity.
  3. Limits on Hobby Expenses.  Generally, you can only deduct your hobby expenses up to the amount of hobby income. If your hobby expenses are more than your hobby income, you have a loss from the activity. You can’t deduct the loss from your other income.
  4. How to Deduct Hobby Expenses.  To do this, you must itemize deductions on your tax return. Your expenses may fall into three types of deductions, and special rules apply to each type. Refer to this IRS guide for the rules about how you claim them on Schedule A, Itemized Deductions.
  5. Use IRS Free File.  Hobby rules can be complex and IRS Free File can make filing your tax return easier. IRS Free File works with brand-name software or you can use Free File Fillable Forms.

For more information visit IRS.gov’s guidance on determining whether an activity is a business or a hobby.