Tax Tips & Calculators
Hobby–Loss RulesYou can deduct hobby expenses up to the amount of your hobby income. Expenses that are more than the income you made from your hobby are nondeductible personal losses.
If you operate a business, your business losses can offset other income on your return. To be considered a business, an activity must have a profit motive.
Three–Years-of-Profit TestThe IRS presumes you carry on an activity for profit if 1 of these applies:
- It makes a profit in at least 3 of the last 5 years.
- It makes a profit in at least 2 of the last 7 years, and your activity is mainly 1 of these:
- Breeding horses
- Showing horses
- Training horses
- Racing horses
Hobby Income vs. Business IncomeThe IRS considers many factors when deciding if your activity is a business or a hobby. No one item is the deciding factor, and the IRS might consider factors not listed.
If your activity is a hobby, report your income on line 21, Form 1040. You can´t deduct expenses in excess of your income, and you can only deduct qualifying expenses if you itemize deductions. Hobby expenses are among the deductions subject to the 2% of AGI floor. Special ordering rules apply to the deductions you can claim. See IRS Publication 535.
Deciding factors include:
- Manner you carry on the activity
- Your and your advisor´s expertise
- Time and effort you put into carrying out the activity
- Your expectation that assets used in the activity might appreciate in value
- Your success in carrying on similar or dissimilar activities
- Your history of income or losses with respect to the activity
- Amount of occasional profits, if any, that are earned
- Your financial status
- Elements of personal pleasure or recreation the activity has for you
Deduct hobby expenses as itemized deductions on Schedule A as part of your miscellaneous itemized deductions. You can only deduct your total miscellaneous itemized deductions if they´re more than 2% of your adjusted gross income (AGI).
People Who Read This Also Read
Related IRS Forms & Publications
- Publication 535 - Business Expenses