We all enjoy hobbies OR, at least, I hope you have a an interest that you can pursue that makes your life bearable. Maybe I should use the term “makes your life interesting”.
Hobbies are activities that you do for pleasure NOT for profit. Hobbies include collecting, craft making and horse breeding/racing to address a few types of hobbies. YOU MUST REPORT ANY INCOME YOU GET FROM A HOBBY ON YOUR TAX RETURN. How you report the income is different from reporting income from a business venture.
You can only deduct expenses from a hobby up to the amount of income. In a business venture you can deduct reasonable and usual expenses even if the net affect is a “loss” for the year. This loss can also be applied against Other Income.
How to determine whether you should report as a hobby or business? Consider these factors (No one factor will determine the activity):
Intent: Are you participating in the activity to gain a PROFIT (the IRS will presume you have a profit motive if in 3 out of 5 years you were profitable)
Is the activity carried on in a business like manner
Do you depend on the income for your livelihood
You have the knowledge needed to carry on the activity as a successful business
You were successful in similar businesses in the past
The activity makes a profit in some years and not in others
These are just a few of the considerations to address when determining whether you are engaged in a hobby OR business. The Presumption of Profits may take a few years to determine when you are initiating the activity. A hobby can change to a business
OR a business can change to a hobby. The IRS has forms and additional rules that can be addressed. Please contact this office if I can be of help.