What are the IRS Hobby Expenses Rules?

Currently, you can’t claim hobby expenses under the IRS rules.

This post is provided for general information only. Please confirm the details and circumstances of your unique situation with your tax accountant or other appropriate advisor before taking action.

Why don’t the IRS rules allow hobby expenses?

This was part of the Tax Cuts and Jobs Act in 2018. Previously, you could claim hobby expenses up to the amount of your hobby income.

Now, the tax law doesn’t allow you to claim hobby expenses at all.

What if your hobby expenses are more than your income?

It doesn’t matter if your hobby expenses are more than your income. You can’t claim them or use them to offset your income.

You have to report the full amount of your hobby income and pay the hobby income tax rate.

Is there any way to deduct hobby expenses?

The only way to be able to deduct hobby expenses is if you’re able to file as a business. This is not a loophole. You actually need to be operating as a business and to be making a profit.

For example, you might have a small side job as a sports referee that you do mainly as a hobby. You can’t claim your referee expenses unless you file as a business. You can, and probably should, file as a business if you’re making a profit no matter how small it is or how small a percentage of your total income it is. If you’re not making enough to make back your expenses, you probably need to keep filing as a hobby.

Is there any point to tracking your hobby expenses?

Even if you can’t claim your hobby expenses, it’s still probably a good idea to track them. You don’t want to get a letter from the IRS saying you have unpaid self-employment taxes because you should have been filing as a business.

Generally, if you make a profit in 3 out of 5 years, the IRS considers you to be a business. If you lose money in 3 out of 5 years, the IRS considers you to be a hobby. If you’re not tracking your expenses, you won’t be able to show if you’re making money or not. You also will have a hard time claiming an exception to the general rule if you have no proof of your income and expenses.

If you need help tracking your hobby income and expenses, there are a variety of free and inexpensive accounting and bookkeeping apps you can use. For help figuring out how you should file your taxes, check out this tax filing software comparison.

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