| What happens when your claims regarding small or | | | | story! Like gambling income, all hobby expenses are |
| home-based business expenses on IRS Form 1040 | | | | limited by the total amount of hobby income reported |
| Schedule C, Profit or Loss from Business (Sole | | | | on Form 1040 Line 21. Furthermore, expenses can only |
| Proprietorship) are disallowed? The Internal Revenue | | | | be deducted in a specific order from the reported |
| Service (IRS) has guidelines that determine whether or | | | | income. The first category to be deducted from the |
| not a business activity is carried on for profit. Rulings | | | | income relates to home mortgage interest and real |
| fundamentally rest on a determination whether or not | | | | estate taxes especially if your hobby requires physical |
| business activity has been profitable in three of the last | | | | space. After these expenses are applied to the |
| five (or the special case; two out of the last seven) | | | | reported income, deductions for advertising, utilities, |
| tax years (including the current year) reported. If your | | | | insurance premiums, and operation-related costs can |
| business fails the "three-years-of-profit" test, the IRS | | | | be deducted. Finally, if any amount of hobby income |
| applies Internal Revenue Code (IRC) Section 183 | | | | remains, depreciation and amortization of property can |
| (Activities Not Engaged in for Profit), also known as | | | | be applied. When only part of the depreciation |
| the "hobby loss rule". When your activities are viewed | | | | expense can be applied to the remaining reported |
| as a hobby rather than a for-profit business, tax claims | | | | income, it is allocated across all depreciable assets |
| reported on the 1040 Schedule C are disallowed, but | | | | involved with the hobby. |
| not forgotten! All income previously reported on | | | | Do you have a record of profitable past performance |
| Schedule C is now reported as a write-in entry "hobby | | | | and believe you are just in a business cycle slump? If |
| income" on Form 1040 Line 21, Other Income. Unlike | | | | you receive a notice from the IRS that raises the |
| business losses that are subtracted from any reported | | | | question of profit motive because of the |
| business income, hobby "losses" can only be reported | | | | "three-years-of-profit" guideline, you have 60 days to |
| as an Itemized Deduction on Line 23, IRS Form 1040 | | | | file IRS Form 5213, Election to Postpone Determination |
| Schedule A under Certain Miscellaneous Deductions. | | | | as To Whether the Presumption Applies That an |
| This category of deductions is subject to a 2% | | | | Activity Is Engaged in for Profit. Best practices suggest |
| threshold based on the adjusted gross income (AGI). If | | | | that you should file this request only in response to |
| a taxpayer does not itemize their deductions, these | | | | correspondence from the IRS rather than as a |
| previously legitimate losses will be lost leaving all the | | | | proactive measure. Seek professional advice |
| income subject to income tax rates. | | | | especially regarding the timing of any tax-related filings |
| The fact that the expenses, associated with | | | | with the IRS. Pay for professional advice especially |
| "hobby"-related activities, are now reported only if the | | | | when filing income taxes; don't be penny-wise and |
| taxpayer chooses to itemize deductions and then, | | | | pound-foolish! |
| subject to the 2%-of-AGI limitation, is only half the | | | | |