You usually cannot deduct expenditures from hobbies, but there are certain factors that can change that. For example, if you start making crafts as a hobby and then begin to earn income from it, does that change it from a hobby into a business? It is important that you determine whether it is a hobby or a business because the IRS has different reporting and tax requirements for each.
A hobby will generally not make you a profit, and if it does, it is usually very small. On the other hand, the prime motive of a business is to make a profit. If your prime motive isn't to generate a profit, the activity is usually considered a hobby. To more fully understand the "not for profit" rules, you can study the IRS publication 535, Business Expenses.
The IRS is quite strict when it comes to taxpayers converting their hobbies into businesses; you will want to ensure that all the requirements are fulfilled. Generally, you can only deduct hobby expenses up to the amount of profit you made from that hobby. The IRS is more generous with business expenses. However, make sure to be very careful when deducting expenses. The IRS scrutinizes these cases carefully to ensure that taxpayers are not turning hobbies into businesses just to write off some of their costs.
If you qualify to deduct hobby expenses, the expenses must still be deducted in a way that is less advantageous than normal business deductions. The deductions must be itemized as a Miscellaneous Itemized Deduction on IRS Schedule A, and only if the total deductions are greater than the standard deduction. You must keep a good record of the expenditures with receipts to ensure you can back your claims if there was to be an audit or inquiry by the IRS.
When making deductions, make sure that your expenditures do not exceed your income. For example, if you have spent $15,000 in buying unique coins, and you earn $10,000 from it, then you cannot deduct all your expenses.Labels: IRS, Tax Deductions, Tax Filing, Taxpayers
