Tax Tips

Your hobbies, also called not-for-profit activities, may have some tax implications.

Hobbies vs. Business

Hobbies are those activities that aren't pursued for profit. If your hobby shows a profit in at least 3 of the last 5 tax years, including the current year, the law assumes you're trying to make money. If you fail the 3-of-5-year test, then it's assumed the activity is a hobby. Either assumption can be overcome with evidence to the contrary.

If your activity is a hobby, report your income on line 21, Form 1040. You can't deduct expenses in excess of your income, and you can only deduct qualifying expenses if you itemize deductions. Hobby expenses are among the deductions subject to the 2% of AGI floor. Special ordering rules apply to the deductions you can claim. See IRS Publication 535.

Expenses from an activity conducted as a business (that is, for profit) are deductible even if they exceed the income from the business. Report the income and expenses on Schedule C or Schedule C-EZ. Use Schedule F if the activity ia a farm activity.

Year-end Planning

Consider both where you stand on the profit-or-loss front and how you're doing on the 3-of-5-year test. If you need to show a profit this year to avoid having your activity branded a hobby, you may want to press for collection of any income you're due and put off paying expenses or buying new equipment until the new year. But note that an occasional small profit from an activity generating large losses, or from an activity in which you have made a large investment, may be an indication the activity is actually a hobby.