Hobby or Business?  Deductibility of Expenses Depends on Your Answer

 Americans found themselves with more time at home during Covid shutdowns and the work from home that followed it.  If you are like some of your fellow Americans, perhaps you found yourself peddling your hobby to make a few dollars.  Turns out, the income received from the sale of hobby goods or services is reportable on your income taxes.

How you are able to deduct your expenses associated with that income depends on whether your activity is determined to be a business or a hobby.  Businesses can deduct expenses against their income and are taxed on the resulting net income.  Hobbies are taxed on the full gross income and expenses are not deductible on your federal return (although you may be able to get a deduction if you itemize on your state return).

How do you know if your activity is considered a business?  No one factor will make this determination, but rather your overall approach to the activity.  Here are a few factors to consider:

  1. Do you maintain detailed, accurate books for the activity?
  2. How much income are you generating from the activity?
  3. Are you making a reasonable profit?
  4. Do you expect to continue making a profit from the activity?
  5. Are you dependent on the income from the activity?
  6. Are any losses outside your control or are the losses normal for your type of business?

Honorine Campisi, CPA