What Can I Claim as a Hobby Expense?
- Technically, you cannot claim anything as a hobby expense. However, you can deduct hobby expenses as a business cost when you earn a profit from your activity, but only up to the amount of your profit. If you earn $3,000 from breeding horses, for example, you can deduct up to $3,000 in expenses. You can deduct anything that is ordinary and necessary in your business. For example, if you refurbish cars, you can deduct labor and parts, but probably not front-row tickets to a race.
- Your hobby expenses must exceed 2 percent of your adjusted gross income -- income minus deductions and exemptions taken before the standard deduction -- and you must itemize your return, so you lose out on the standard deduction. If you actually run a business, you can deduct any expenses on Schedule C. However, earning a profit does not turn your hobby into a business. You must pursue the trade with the expectation of a profit. The IRS considers your trade a business when you earn a profit in three out of the last five years. If you never make a profit, the IRS may look at whether you take part in the activity as if it were a business, such as advertising and keeping good records.
- Turning your hobby into a business is sometimes more expensive than treating it as just a hobby. If you are a sole proprietor, you must pay the self-employment tax, which is 15.3 percent on most income at the time of publication. Also, you have to pay quarterly estimated tax payments or likely face underpayment penalties on your self-employment income.
- If you cannot determine whether you hobby meets the definition of a business, talk to a tax professional that specializes in your activity. Some trades have different profit tests. For instance, if you breed or race horses, you only need to show a profit in two out of the past seven years. At the very least, consult IRS Publication 535, which contains the most common business expenses you can deduct.