Tax Tips for Reporting Hobby Income

Millions of people enjoy hobbies. They can also be a source of income. Some of these types of hobbies include stamp or coin collecting, craft making and horse breeding. You must report any income you get from a hobby on your tax return.

How you report the hobby income is different than how you report income from a business. There are special rules and limits for deductions you can claim for a hobby.

Here are some basic tax tips you should know if you earn income from your hobby:

Business versus Hobby Income.  A key feature of a business is that you do the activity to make a profit. This differs from a hobby that you may do for sport or recreation. There are nine factors to consider when you determine if you do the activity to make a profit. Refer to Publication 535, Business Expenses to learn more.

Allowable Hobby Deductions.  You may be able to deduct ordinary and necessary hobby expenses. An ordinary expense is one that is common and accepted for the activity. A necessary expense is one that is helpful or appropriate.

Limits on Expenses.  As a general rule, you can only deduct your hobby expenses up to the amount of your hobby income. If your expenses are more than your income, you have a loss from the activity. You can’t deduct that loss from your other income.

How to Deduct Expenses.  You must itemize deductions on Schedule A on your tax return in order to deduct hobby expenses. Your costs may fall into three types of expenses. Special rules apply to each type. A Dallas CPA can help you determine how to deduct your hobby expenses.

The IRS distinguishes hobby income and business income based on numerous factors. Whether you’re selling a few items to friends and neighbors or operating an Etsy shop, a Dallas CPA can help you to make sure you’re appropriately reporting income on your tax return. Contact us today for a consultation.

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