How to Deduct Hobby Expenses From Federal Taxes
Like many facets of the tax code, dealing with hobby income and deductions can seem like a daunting task. But once you understand the basic differences between a business and a hobby, it becomes clearer. In essence, if you run your hobby with the intent to make money, then it's a business. But if your hobby is a personal pleasure that just happens to sometimes make money, then the IRS will see it as a hobby. In terms of deductions, both businesses and hobbies can take them, but hobbies are limited in that they can't show a loss.
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Instructions
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Verify that you have a hobby. This is the crucial part of determining what and how much you can deduct. According the IRS, if you are running your hobby like a business--your focus is on making money and you need that money to live on--then it's not a hobby. While a hobby can make money, the focus needs to be on the pleasure of the activity, not on making money, improving profitability, or creating an income that is required for you to live on.
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Keep track of your expenses. Allowable deductions can be any reasonable and customary expenses required to run the business, such as the cost of materials or travel to trade shows. You can deduct depreciation and amortization on property used in the hobby as well. Save all your receipts and statements to verify your deductions.
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Track your income. You need to keep good records on the income you've earned, as well as the deductions you want to take. Develop a system to track your income, even if it's just a few dollars. For hobbies, the IRS only allows deductions up to the amount the hobby earned. If the hobby earned $1,000 and your expenses were $1,500, you can only deduct $1,000, whereas in a business you can report a loss and deduct it all (within reason). So, if you want to deduct a lot of your expenses, you'll need to account for all your income.
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File deductions on your 1040 Schedule A. (Schedule C is used for businesses.)
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