I often get calls and emails from clients who want to run their hobby into a tax loss by deducting all sorts of related expenses. Hmnn, well sometimes this works and sometimes it doesnt. So let’s dive into what the IRS considers a hobby versus a business.
The great idea is that you have a business, dog walking or jewelry making and your expenses exceed your income so now you have a loss to deduct on your tax return against your income from your full time job. The IRS does not like the idea so in 2018, the law changed and NOW you can ONLY deduct costs of materials and supplies. You can NO LONGER deduct your auto expenses or meals or cell phone or any other typical business expenses included under the definition of “ordinary and necessary” business expenses.
Activities that the IRS looks at closely as possible hobbies so that your deductions are limited include: Artists, auto racing, bed & breakfasts, craft sales, direct sales, dog related services, fishing, gambling, photography, stamp collecting and writing.
Now if you truely are running a business in any one of these areas then absolutely you should deduct all your related business expenses but be clear that if the IRS comes looking, you will need to be able to show that you carry on the activity in a businesslike manner, maintaining accurate accounting records, separate banking and the necessary business insurance and licenses.
So do you have a hobby or a business?
Reach out to me and let’s discuss your situation and see how we can help.