On an average day, 95 percent of Americans age 15 and older engage in some sort of leisure activity, according to the American Time Use Survey by the U.S. Bureau of Labor Statistics. Many of these activities are considered hobbies, which can turn into sources of income for millions of fortunate Americans.
Those who do earn income from their hobbies must report the income on tax returns. There are, however, special rules and limits for deductions you can claim. Here are four tax tips about hobbies from the IRS.
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. Consider these nine factors when determining whether your activity is a hobby or a business:
• Whether you carry on the activity in a businesslike manner.
• Whether the time and effort you put into the activity indicate you intend to make it profitable.
• Whether you depend on income from the activity for your livelihood.
• Whether your losses are due to circumstances beyond your control (or are normal in the startup phase of your type of business).
• Whether you change your methods of operation in an attempt to improve profitability.
• Whether you, or your advisers, have the knowledge needed to carry on the activity as a successful business.
• Whether you were successful in making a profit in similar activities in the past.