You can write off hobby expenses on your taxes. However, there are rules you need to know. There are two types of deductible hobby expenses: those related to the hobby itself, and those for materials used. For example, equipment, supplies, and workspace upgrades for the hobby.
IRS Regulations
- To write off expenses, the IRS says your hobby cannot aim to make a profit. You must show the activity’s purpose is recreational or educational. In other words, deduct only non-profit expenses. Deductions cannot exceed hobby income. If expenses outpace income, you cannot deduct the excess from other income.
Deduction Limits
- If your hobby is stamp collecting and all you ever do is buy stamps without ever selling one, your costs are not deductible as a hobby expense. Your hobby hasn’t brought in any income. On the other hand, if your hobby is showing horses and you win cash prizes or others pay you for your expertise, the costs you incur may be deductible.
Income Reporting and Expenses
- You must report hobby income on your tax return. Report expenses correctly to avoid problems. Keep detailed records of all hobby income and costs. This supports accurate tax reporting.
IRS Rule on Hobby Income
- According to the hobby loss rule, you cannot deduct hobby expenses that exceed hobby income. Deductions cannot outpace income from hobbies. The IRS distinguishes between hobbies and businesses for tax purposes. Factors like profit intent define a business versus a hobby.
Business vs. Hobby
- The IRS assesses several factors to categorize an activity as a hobby or business. Legitimate businesses aim to profit, unlike hobbies engaged in for sport or recreation. If the IRS defines an activity as a hobby, it limits deductible expenses under the hobby loss rule. Exceptions enable deductions equal to hobby income. By contrast, businesses can fully deduct business expenses to lower taxes. Taxpayers should report all hobby or business income on returns.