Most all businesses were hobbies at one point or another, but the question becomes where does it draw the line?  According to the IRS. Section 183 (the hobby loss rule) limits the amount of of deductions when an activity is not engaged in for profit.  Yes there is a distinct difference between the two, and this will hopefully explain it what you can deduct as a hobby expense.

Specifically, ask yourself these questions provided by the IRS:

  • Does the time and effort put into the activity indicate an intention to make a profit?
  • Do you depend on income from the activity?
  • If there are losses, are they due to circumstances beyond your control or did they occur in the start-up phase of the business?
  • Have you changed methods of operation to improve profitability?
  • Do you have the knowledge needed to carry on the activity as a successful business?
  • Have you made a profit in similar activities in the past?
  • Does the activity make a profit in some years?
  • Do you expect to make a profit in the future from the appreciation of assets used in the activity?
  • Did it make a profit in at least 3 of the last 5 tax years including the current year?  This definition is expanded if it’s been 2 years for the last 7 years that are primarily related to: breeding, showing, training, or racing horses.

Now getting back to the hobby deduction.  If your hobby is not-for-profitt, then you have the potential of deducting the expenses when it’s for individuals, partnerships, estates, trusts, and S corporations.  Your losses cannot be greater than the amount of the total receipts you also spent on the activity also.  To count on this deduction, it is completed on a Schedule A, Form 1040.  For more information, please consult your tax consultant or review it on the web site.

Dwayne J. Briscoe, Owner
Bookkeeping-Results, LLC

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