SAVING US EXPATS MONEY FOR OVER 10 YEARS.
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Many Americans enjoy hobbies that are also a source of income. It is important to remember that any income, even if generated from hobby needs to be reported on a tax return. Income and expenses are reported differently when you are carrying out a business or simply enjoying your hobby. Therefore the starting point for anyone who is unsure is to determine whether the activity is in fact a hobby or business activity.
The IRS provides useful nine factors to determine whether your activity is business or hobby:
- Whether you carry on the activity in a business-like manner.
- Whether the time and effort you put into the activity indicate you intend to make it profitable.
- Whether you depend on income from the activity for your livelihood.
- Whether your losses are due to circumstances beyond your control (or are normal in the start-up phase of your type of business).
- Whether you change your methods of operation in an attempt to improve profitability.
- Whether you or your advisors have the knowledge needed to carry on the activity as a successful business.
- Whether you were successful in making a profit in similar activities in the past.
- Whether the activity makes a profit in some years and how much profit it makes.
- Whether you can expect to make a future profit from the appreciation of the assets used in the activity.
If you are still not sure after going through the factors, the IRS provides further guidance on ‘not-for-profit’ rules, in its Publication 535, Business Expenses.
If you determined that the activity is considered to be a hobby, you need to look at the allowable deductions and their limits. Generally you will be able to deduct ordinary (common and accepted for the activity) and necessary (appropriate for the activity) hobby expenses and you will be able to deduct hobby expenses only up to the amount on hobby income. Unfortunately hobby loss cannot be deducted from other income on your tax return.
On your tax return:
Your hobby income needs to be included on line 21 (other income). In order to deduct hobby expenses, you must itemize your deductions on the tax return and claim the hobby expenses on Schedule A. See Publication 535 to see which categories of expenses go where on Schedule A.