Maybe you cater for your friends, maybe you make jewelry, maybe you sell your artwork, maybe you have a lemonade stand—regardless of what you do, do you know how the IRS views this? Here are some tips on how to tell if your activity is a business or a hobby and the tax implications of each.
The IRS has a checklist for determining if your activity is a business or hobby. The list is basically intent. Is this for fun or do you intend to make a profit? Do you want to depend on the income? What is the intent of your activity?
For the IRS list that discusses the difference between a business and a hobby click here.
Now that you have figured out if your activity is a business or hobby, how does that affect your taxes? Hobby deductions are only allowed up to the total income. This means if you made $100, but your expenses are $500, you’re only allowed to deduct $100.
There is a catch to deducting hobby expenses, you have to itemize. Itemizing on a Schedule A includes things such as mortgage interest, property taxes, and gifts to charity.
For complete rules on Schedule A deductions click here. All of these deductions have to be over the standard deduction—the automatic deduction you get based off your filing status. It is most beneficial to take whichever is higher, but technically you would not be deducting your hobby expenses if you cannot itemize.