By Dave Horwedel, EA, founder of Torchlight Tax
You cannot deduct hobby expenses. But you can deduct business expenses. Many businesses started as hobbies.
Many hobbyists, who turned their hobbies into businesses, could have deducted their “hobby expenses” as business expenses if they had known the rules and started the business before they incurred the expenses.
Also, if you have a small business that might sound like a hobby, you can take certain steps to make sure that it qualifies as a business in the eyes of the IRS. This is because you get tax breaks in a business that you do not get in a hobby.
Losing money in starting a business can lower your tax bill! (But don’t make it a habit, as you are better off making more money).
Let’s say you work a 9 to 5 office job, love photography and dream of being a photographer. Well, stop dreaming, keep your day job, and start the business evenings and weekends. If you are industrious, you may likely succeed.
So, start the business and then buy the additional equipment you need. Start selling photography services right away if you can. A neighbor wants a picture of his new baby. Get him to pay you something and put it into the business bank account you opened. Maybe you do a $300 job for $25. OK. Collect it, give him a receipt, and put the money into your business bank account.
This is evidence that you have started a business by that point.
You can hone your photography skills by taking advanced training and deduct this as a business expense. If you follow the rules, you can deduct as business expenses the equipment and training you need to really get your business going.
What rules to follow?
These are detailed in the IRS article below. This is direct and verbatim from the IRS website.
This article can apply to all kinds of hobbies—from bowling to wood carving, skydiving to making moccasins.
You do not have to read the IRS article if you do not wish to. (Some people are allergic to the IRS and experience terror, headaches, or other pains and discomfort at the thought of reading an IRS article.).
You can skip reading the article and contact Torchlight Tax for a free consultation.
Contact Torchlight Tax at 877-758-7797 or email us at info@TorchlightTax.com for a free consultation. You can also read articles on our blog at Torchlighttax.com or visit our Torchlight Tax YouTube Channel for more tax data.
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Below is the article from the IRS website verbatim.
Hobby or business: here’s what to know about that side hustle
IRS Tax Tip 2023-61, May 3, 2023
Sometimes the line between having a hobby and running a business can be confusing, but knowing the difference is important because hobbies and businesses are treated differently when it’s time to file a tax return. The biggest difference between the two is that businesses operate to make a profit while hobbies are for pleasure or recreation.
Whether someone is having fun with a hobby or running a business, if they accept more than $600 for goods and services using online marketplaces or payment apps, they could receive a Form 1099-K. Profits from the sale of goods, including personal items, and services is taxable income that must be reported on tax returns.
There are a few other things people should consider when deciding whether their project is a hobby or business. No single thing is the deciding factor. Taxpayers should review all of the factors to make a good decision.
How taxpayers can decide if it’s a hobby or business
These questions can help taxpayers decide whether they have a hobby or business:
- Do they carry out the activity in a businesslike manner and keep complete and accurate books and records?
- Does the time and effort they put into the activity show they intend to make a profit?
- Does the activity make a profit in some years – if so, how much profit does it make?
- Can they expect to make a future profit from the appreciation of the assets used in the activity?
- Do they depend on income from the activity for their livelihood?
- Are any losses due to circumstances beyond their control or are the losses normal for the startup phase of their type of business?
- Do they change their methods of operation to improve profitability?
- Do the taxpayer and their advisors have the knowledge needed to carry out the activity as a successful business?
Whether taxpayers have a hobby or run a business, good record keeping is always key when it’s time to file taxes.