The Thomas Howell Ferguson Blog

Words Count

Four Things to Remember about Hobby Income and Expenses

From scrapbooking to glass blowing, many Americans enjoy hobbies that are also a source of income. You must report income on your tax return even if it is made from a hobby. However, the rules for how to report the income and expenses depend on whether the activity is a hobby or a business. There are special rules and limits for deductions that you can claim for hobbies. Here are four things to consider:

  • Determine if the activity is a business or a hobby. If someone has a business, they operate the business to make a profit. In contrast, people engage in a hobby for sport or recreation, not to make a profit. You should consider whether the activity is a business or a hobby and base your determination on all the facts and circumstances of your activity.
  • Allowable hobby deductions. You can usually deduct ordinary and necessary hobby expenses within certain limits:
    • Ordinary expense is common and accepted for the activity.
    • Necessary expense is appropriate for the activity.
  • Limits on hobby expenses. You can generally only deduct hobby expenses up to the amount of hobby income. If hobby expenses are more than its income, you have a loss from the activity. However, a hobby loss can’t be deducted from other income, and the loss is not carried forward to offset future income in subsequent years.
  • How to report hobby income and expenses. You must report the income and expenses from a hobby activity in different sections of your personal tax return.  The hobby income is reported as other income on page 1 of your personal tax return and is not subject to self-employment tax since the activity is a hobby. However, the expenses related to the hobby are shown as itemized deductions on your tax return and are reported on Schedule A as other itemized deductions subject to the 2% of AGI (adjusted gross income) floor. Since the total of the hobby expenses is limited to the total of hobby activity income and as a result of the treatment of the itemized deductions subject to 2% of the taxpayers AGI, the hobby activity can result in net taxable income to the taxpayer.

For more information on how to report hobby income and expenses, always consult a Certified Public Accountant. Submitted by: Dennis Gallant, Senior Manager, Tax Services, Thomas Howell Ferguson P.A. CPAs, (850) 668-8100, dgallant@thf-cpa.com.