June 18, 2020

Optima Tax Relief provides assistance to individuals struggling with unmanageable IRS tax burdens. To assess your tax situation and determine if you qualify for tax relief, contact us for a free consultation.

Having a hobby can sometimes make you money on the side. This extra money can be used to go shopping or put in savings. But, did you know that if the IRS deems your hobby as a business, you’ll have to report any income that you’ve earned?

Here’s how to distinguish whether you have a business or a hobby:

What’s the difference between a hobby and a business? For the most part, hobbies are considered a recreational pastime that people do. A business on the other hand is operated to earn either a profit or a loss. As a business you are also able to deduct certain expenses throughout the year that could help you receive a bigger refund or take away from a tax liability that you may owe

How can I distinguish my hobby from self-employed income? There are a few ways to understand if your hobby is more than just a hobby. One way is to ask yourself the following questions and if you say yes to any of them, your hobby could be considered a business:

  • Do I rely on this income to survive?
  • Do you intend to earn profit off your hobby and have you previously?
  • Do you expect to make a future profit off of it?
  • Are your losses a normal part of startup costs or are they due to circumstances you can’t control?

If you’re still confused even after answering the above questions, then you can refer to the IRS guidelines. If you have made a profit in three of the last five years, the IRS will consider that profit towards a business. 

Can I make tax deductions for my hobby? The answer to this is no. Under the Tax Cuts and Jobs Act, miscellaneous itemized deductions can no longer be deducted for tax years after 2017. To put it simply, it means that your hobby-related expenses do not qualify as an actual deduction.

If you need tax help, contact us for a free consultation.