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Tax Tips about Hobbies and a Home Office from the Internal Revenue Service (IRS)

Tax Tips about Hobbies and a Home Office from the Internal Revenue Service (IRS)

by | 52 Tax Tips and Weekly Financial Blog

 

 

From a small wooden box in a corner of your room, to a coveted wall in your study, they have grown with you. You have them from all over the world like Japan, China, Spain, Portugal, Ghana, Morocco and the like. Your collection of stamps is enviable! That’s what hobbies do to you. They grow with you and drive you to passionately increase your collection- be it of stamps, coins, flowers or any other object of interest. If you enjoy any hobby like stamp collecting, fishkeeping, gardening, sculpting, horsemanship and the like, and your hobby is also a source of income, then you must report the income you earn from your hobby on your tax return.

The rules for how you report the income and expenses depend on whether the activity is a hobby or a business. There are special rules and limits for deductions you can claim for a hobby.

Here are five tax tips you should know about hobbies:

1. Is it a Business or a Hobby?

A key feature of a business is that you do it to make a profit. You often engage in a hobby for sport or recreation, not to make a profit. You should consider the IRS nine factors:

  • You carry on the activity in a businesslike manner
  • The time and effort you put into the activity indicate that you intend to make it profitable
  • You depend on income from the activity for your livelihood
  • Your losses are due to circumstances beyond your control, or are normal in the startup phase of your type of business
  • You adjust your methods of operation to improve profitability
  • You (or your advisors) have the knowledge needed to carry on the activity as a successful business
  • You were successful in making a profit in similar activities in the past
  • The activity makes a profit in some years, and how much profit it makes
  • You can expect to make a future profit from the appreciation of the assets used in the activity when you determine whether your activity is a hobby.

Make sure to base your determination on all the facts and circumstances of your situation. For more about business rules see Publication 535, Business Expenses, or contact Azmoneyguy or your tax professional.

2. Allowable Hobby Deductions.

Within certain limits, you can usually deduct ordinary and necessary hobby expenses. An ordinary expense is one that is common and accepted for the activity. A necessary expense is one that is appropriate for the activity.

3. Limits on Hobby Expenses.

Generally, you can only deduct your hobby expenses up to the amount of hobby income. If your hobby expenses are more than your hobby income, you have a loss from the activity. You can’t deduct the loss from your other income.

4. How to Deduct Hobby Expenses.

You must itemize deductions on your tax return in order to deduct hobby expenses. Your expenses may fall into three types of deductions, and special rules apply to each type. See Publication 535, Azmoneyguy or your tax professional for the rules about how you claim them.

 

5. Use IRS Free File.

Hobby rules can be complex and IRS Free File can make filing your tax return easier. IRS Free File is available until Oct. 15. If you make $66,000 or less, you can use brand-name tax software. If you earn more, you can use Free File Fillable Forms, an electronic version of IRS paper forms. Free File is available only through the https://www.irs.gov/ website.

Home Office Deductions

 If you work from home, you should learn the rules for how to claim the home office deduction. Since 2013, when the Home Office Act was signed, a simpler option was created to figure the deduction for business use of your home. The new option may save you time because it simplifies how you figure and claim the deduction. It can also make it easier for you to keep records. It does not change the rules for who may claim the deduction.

Here are six tips from the IRS about the home office deduction:

1. Generally, in order to claim a deduction for a home office, you must use a part of your home exclusively and regularly for business purposes. Also, the part of your home used for business must be:

  • Your principal place of business, or
  • A place where you meet clients or customers in the normal course of business, or
  • A separate structure not attached to your home. Examples might include a studio, garage or barn.

 

2. If you use the actual expense method, the home office deduction includes certain costs that you paid for your home. For example, if you rent your home, part of the rent you paid could qualify. If you own your home, part of the mortgage interest, taxes and utilities you paid could qualify. The amount you can deduct usually depends on the percentage of your home used for business.

3. You may be able to use the simplified option to claim the home office deduction instead of claiming actual expenses. Under this method, you multiply the allowable square footage of your office by a prescribed rate of $5. The maximum footage allowed is 300 square feet. The deduction limit using this method is $1,500 per year.

4. If your gross income from the business use of your home is less than your expenses, the deduction for some expenses may be limited.

5. If you are self-employed and choose the actual expense method, use Form 8829, Expenses for Business Use of Your Home, to figure the amount you can deduct. You claim your deduction on Schedule C, Profit or Loss from Business, if you use either the simplified or actual expense method. See the Schedule C instructions for how to report your deduction.

6. Since 2018, employees no longer can write off Employee Business Expenses. You should work with your employer to get a reimbursement for out of pocket expenses, you might spend to complete your job. Even if the employer reduces your pay for any reimbursement, you would still be better off. There are no taxes AT ALL, for the amount reimbursed by your employer! Even the employer wins, since there are payroll taxes on the amounts reimbursed either! WIN WIN!

Call today, don’t delay! See how this affects you. We can be reached at 602-264-9331 and on all social media under azmoneyguy.
Be more prepared for this year’s tax season! Get your copy of Bob’s NEW book, 52 Ways to Outsmart the IRS, Weekly Tax Tips to Save You Money on Amazon, Kindle, or at Azmoneyguy.com (available in paperback and eBook).

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Tax and Financial Advice from an expert

Mr. Hockensmith has been a guest newscaster for national and local TV stations in Phoenix since 1995, broadcasting financial and tax topics to the general pubic. He has written tax and accounting articles for both national and local newspapers and professional journals. He has been a public speaker nationally and locally on tax, accounting, financial planning and economics since 1992. He was a Disaster Reservist at the Federal Emergency Management Agency, for many years after his military service. He served as a Colonel with the US Army, retiring from military service after 36 years in 2008. Early in his accounting career, he was a Accountant and Consultant with Arthur Andersen CPA’s and Ernst & Young CPA’s.

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