Tax Treatment of Income from Hobbies

Countless Americans take pleasure from hobbies that also generate income. Collectibles of all types have skyrocketed in popularity, as well as income potential, in the last fifty years. Whether its dolls, baseball cards, stamps, coins, or Star Trek action figures, all types of hobbies have the potential to generate some amount of income, which, of course, is taxed by Uncle Sam.

The rules for reporting the income and expenses associated with a “hobby” depends upon whether or not the activity in question is a hobby or business. There are deductions that hobbyists may claim but they, like most everything, are subject to special rules and limits imposed by the Tax Code.

If a taxpayer engages in an activity for sport or recereation rather than to make a profit, generally, this would establish the activity as a hobby. But of course, it’s not this simple. The IRS has established nine factors that taxpayers should consider in assessing whether or not their particular activity is a business or hobby.

The nine factors to help taxpayers distinguish an activity between a business and hobby are as follows:

  • Whether the activity is carried on in a businesslike manner.
  • Whether the time and effort put into the activity indicate an intention to make it profitable.
  • Whether the taxpayer is dependent upon the income from the activity for his or her livelihood.
  • Whether losses are due to circumstances beyond a taxpayer’s control or are normal in the startup phase of the particular type of business.
  • Whether methods of operation are changed in an attempt to improve profitability.
  • Whether the taxpayer or his or her advisors have the necessary knowledge operate the activity as a successful business.
  • Whether the taxpayer was successful in making a profit in similar activities in the past.
  • Whether the activity makes a profit in some years and the extent of such profit.
  • Whether a taxpayer may expect to earn a future profit from the appreciation of the assets used in the activity.

Taxpayers may deduct ordinary and necessary hobby expenses, but only up to the amount of hobby income. Otherwise, a taxpayer experiences a loss from the activity. An ordinary expense is one that is common and accepted for the activity, while a necessary expense is one that is appropriate for the activity. Hobby expenses must be itemized on a return. These expenses may fall into any of three categories of deductions, all with special rules.

If you have questions about whether a profit-making activity in which you participate is a hobby or business, contact THE TAX EXPERTS at the Thorgood Law Firm For a FREE consultation, call 212-490-0704. Have a fun and safe Halloween!Tax Treatment of Income from Hobbies

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