Have you ever taken the hobbies deduction? Does this actually work? How did you get away with it?
There is no “hobby deduction”. The hobby deduction rules, or not-for-profit activity rules, as the IRS calls them, are a restriction on deductions which would otherwise be allowed for income generating activities. If you have paying ads on your website, for example, you have income that is required to be reported. If your website were a for-profit activity, you would report the income and allowable deductions on Schedule C of Form 1040. If your deductions exceeded your income, you would have a loss that would offset other income in arriving at adjusted gross income (AGI).
If your website were, as the vast majority are, a not-for-profit activity, a hobby, you would still report the income on the “other income” line on Form 1040, but any deductions would go on Schedule A, as itemized deductions subject to the 2% of AGI floor. In the case of many, if not most taxpayers, that would effectively mean no deduction at all. Moreover, any deductions in excess of income cannot be taken.
The most common not-for-profit activity is gambling. The most litigated appears to be either horse farms or self published books. I remember a case a few years back in which a guy who had written a book about Nevada brothels wanted to deduct the money paid to prostitutes as a “research expense.” The Tax Court didn’t agree.
Let’s keep this alive until the 16th
Thanks Synergist. Correct me if I am wrong. Let’s say my hobby is making feather earrings which I sell on the web. This is an expensive hobby [it costs alot to hunt peacock feathers], would it be possible to say to the IRS that I try to recoup my hobby costs because otherwise I couldn’t do what I want to do? Ergo, I can substract my hobby costs from whatever income I might earn which would effectively reduce my taxable income? Just wanna know.
If you sell a pair of peacock feather earrings for more than it cost to make, then you would report only the difference as income. By “cost to make” I mean the direct cost of the materials, not any overhead or costs of marketing. Those costs would be an itemized deduction and limited to your gross income from sales.
(My experience suggests that most IRS employees would tell you that all costs, direct and indirect have to be taken as itemized deductions, or not at all. In other words, that you would include REVENUES, not gross profit, in gross income. There is a 55 year old Supreme Court case that says otherwise and it’s still good law.)
If you sell your earrings for less than your direct costs, you simply have no income to report, but you still don’t get a deduction.
You are only allowed to deduct hobby expenses to the extent that you have hobby income. No more.
Thanks. Hey…drop those peacock feathers!