Hobbies that Earn Income

Hobbies such as knitting, woodworking, or jewelry making are not only enjoyable but can often be lucrative, as well. Many people earn side income from hobbies or side projects, and it’s important to report that income on your tax return. The way you report this “hobby” income, however, is different from the way in which you report income from a business, with many special rules and limits for deductions you can claim for a hobby. For those of you who earn income from hobbies, here are five basic tips to put you on the right track: 

Business or Hobby?

While many people earn money from their hobbies, some hobbies may be actual side businesses. A few key questions to ask yourself when determining if yours is a hobby or a full-fledged business include: 

• Do you perform the activity in a businesslike manner? 
• Do you put in enough time or effort to make the activity profitable? 
• Do you depend on this side income for a living? 
• If you’ve experienced losses, are your losses due to circumstances beyond your control (or just normal in the start of a business)? 
• Have you changed your methods to improve profitability? 
• Do you or your advisors have the know-how needed to carry on a successful business? 
• Have you made a profit from a similar activity in the past? 
• How much profit did you make? 
• Can you expect to make a future profit from the appreciation of business assets used in this activity? 

Make sure you consider all the facts of your particular situation to decide whether your project is a hobby or a business. Refer to the IRS’s Publication 535, Business Expenses, or visit IRS.gov and search for “not-for-profit” to learn more. 

Allowable Hobby Deductions

If your activity is indeed a hobby, you may be able to deduct ordinary and necessary hobby expenses. These include expenses that are common and accepted for the activity – such as yarn or needles for a knitter. A necessary expense is one that is helpful or appropriate – such as a new knitting basket or pattern book. See Publication 535 for more info. 

Limits on Expenses

As a general rule of thumb, you can only deduct your hobby expenses up to the amount of your hobby income. If your expenses are more than your income, you have a loss from the activity and cannot deduct this loss from your other income. 

Deducting Expenses

In order to deduct hobby expenses, you must itemize deductions on your tax return. Your costs may fall into three different types of expenses, and unique rules apply for each type. See Publication 535 for how to report them on Schedule A, Itemized Deductions. 

IRS Free File

Rules for hobbies can be complicated. Fortunately, IRS Free File can make filing your tax return a lot easier. If you make $62,000 or less, you can use brand-name tax software. If you earn more than that, you can use Free File Fillable Forms, an electronic version of IRS paper forms. 

More information can be found on the IRS Tax Tips page at any time. If you still have questions, however, we’re happy to answer them. Be sure to check out our services page and fill out the form for a free consultation. Or give us a call at 844-841-9857!