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IRS Hobby Guidelines Aim to Clear Confusion

When Pleasure Becomes Business, Tax Rules Kick In

They say that when you love your job, then it’s not really work. If you’re lucky to have your hobby as your job, then the rat race is something you can look forward to.

But if you take your hobby too far in terms of profit, the IRS may come a’knockin. Rules apply for those who mix business with pleasure, and if your hobby brings you profit, make sure you’re on sound financial footing.

A hobby is considered for profit if it brought you a profit in at least three of the last five tax years. This includes the current year.

Generally, expenses necessary for performing a trade, running a business or producing income are deductible at tax time. But if your hobby is only a hobby, don’t count on being able to make those deductions.

The tax code limits deductions that can be claimed when your hobby isn’t bringing you a profit. It’s called the “hobby loss rule” and it applies to individuals and a host of business entities.

In sum, if your hobby isn’t for profit, your deductions can’t exceed your hobby’s gross receipts. Deductions for hobbies are claimed on IRS Form 1040, Schedule A, and must be taken in the following order:

  • Deductions for certain personal expenses like home mortgage interest and taxes. These can be taken in full.
  • Deductions that don’t impact a property’s tax value, like advertising, wages and insurance premiums. These can be taken to the extent your hobby’s gross income is more than the deductions from the first category.
  • Deductions that reduce a property’s tax value, like depreciation and amortization. These are taken last, but only to the extent that your hobby’s gross income is more than the deductions for the first two categories.

Having your hobby as your job can be a very satisfying experience. So can being free of back tax debt. Instead of focusing on an IRS wage garnishment or bank levy, hire a tax attorney. That way, you can put that time and energy into your own hobby while your tax attorney focuses on their hobby: dueling with IRS agents.

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