Question

I have a question about hobby taxes from selling my crafts at a craft show. Can I deduct the expenses incurred from making the crafts from my taxes? Also, I am not sure what a profit motive is, but another crafter said I may need to show profit motive in order to properly file my taxes. Can you explain?

Answer

Since this is a multi-prong question, let’s begin by addressing the hobby tax question. The answer to whether or not you can deduct your expenses incurred from making the crafts is…maybe. To clarify, the answer will depend on how you’re engaged in this activity. You will need to define this activity as one of the following:

  • As a hobby
  • As a for-profit activity

The IRS usually considers you in an activity for profit if you’ve made a profit for three of the past five years. Otherwise, you have to establish a profit motive. You will determine your profit motive based on factors like:

  • If you carry on the activity like a business
  • Your expertise
  • Time and effort you spend on the activity
  • Your success in carrying on other similar or dissimilar activities
  • Your history of income or losses for the activity
  • Amount of occasional profits, if any, that you earn
  • Your financial status
  • If the activity has elements of personal recreation

Hobby Income and Expenses

If the activity is a hobby, you will report the income on Form 1040, Line 21. The income won’t be subject to self-employment tax and you can only deduct hobby expenses up to the amount of your income from the hobby.

To claim your expenses:

  • You also must itemize the expenses.
  • Your expenses are subject to the 2% of adjusted gross income (AGI) limitation.

You won’t be able to claim the home office deduction. You can only claim that deduction if you have business income.

For-Profit Income and Expenses

If you engage in the activity for profit, you will need to report your income and expenses on Schedule C. You’ll pay self-employment tax on your earnings. However, your expenses won’t be limited. You might also qualify to deduct your home office expenses.

To claim home office expenses, you must use the space regularly and exclusively for your business. Also, the office must be one of these:

  • Your main place of business
  • A place where, in the normal course of a trade or business, you meet or deal with:
    • Patients
    • Clients
    • Customers
  • A structure not attached to your home used for the trade or business

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