Taking up a hobby is a great way to unwind, meet new people and to cultivate a new skill. Pursuits such as sports provide a fun physical outlet while activities such as photography, content creation, crafting, and writing can satisfy our creative needs.
At some point, you may end up making money from your craft. For example, you sell a bracelet to a co-worker who in turn refers a dozen friends to you for a similar item.
Are My Hobby Expenses Deductible?
A key clause in the 2018 tax law prohibits deducting hobby expenses that exceed any income form that pursuit, but are hobby expenses still deductible?
Suppose you spent $500.00 in jewelry making supplies and ending up selling $600.00 worth of jewelry this year. Is the $500.00 in expenses deductible? As of the 2018 tax year, the answer is “no.”
Let’s look at how the IRS determines whether or not your jewelry-making hobby is an enterprise or a hobby.
It’s a business if:
- Some or all of your income comes from your hobby.
- Your hobby experiences profits and losses: you earn a significant amount of money from Valentine’s Day, sales, but you took a loss on Mother’s Day jewelry.
It’s a hobby if:
- You expect no profit in return
- You make jewelry strictly for recreation
Beginning in 2018, you must claim all hobby income, and you can’t deduct hobby expenses from that income.
Is It A Business Yet?
Suppose you started out crafting jewelry strictly as a way to de-stress at the end of the day.
A few months later, you sell some pieces to friends and co-workers, and suddenly you’re taking orders and you’ve set up an Etsy store to showcase your handiwork.
The extra cash comes in handy and allows you to pay down some of that credit card debt or finance your kid’s braces.
Things may change at this stage, as your creativity begins to earn some money for you. Is it a business or still a hobby?
The IRS will consider your acitivity a business if any or all of the following apply:
- You conduct activities aimed at making a profit, such as advertising and hiring an employee.
- You’ve made a profit from a similar pursuit in the past
- You’ve turned a profit three out of the past five years
- You earn your living from your hobby
- You hope to make a profit from some of your business assets four or five years in the future
In this case, you’ll need to attach a Schedule C to your federal return. The Schedule C will list your income as well as expenses, and you will be taxed on the net income (income after deductions for expenses).
You’ll want to keep meticulous income and expense records at this stage, so you can accurately report your earnings and expenses.
Keep track of receipts for supplies, postage, advertising, and every other expense related to your hobby-turned-business. By keeping accurate records, you will pay the correct amount of income tax, and you’ll be ready should your return be selected for an audit.
To learn more about IRS rules regarding hobby income, consult Publication 535 If you need more help, consult a licensed tax professional. They’ll walk you through filing your taxes, and can answer any questions pertaining to your tax return.