Hobbies are a great way to spend the other 8 hours, but they are terrible from a tax perspective. Why? You are not allowed to deduct hobby expenses for tax purposes. This makes sense. If you could deduct hobby expenses almost everything would be deductible -- trips to the zoo, your subscription to Professional Photographer magazine, and even that new digital camera you've had your eye on. If it's a hobby expense, the IRS says NO. But is there a way to legally deduct those expenses and many more? The IRS says YES. Stop thinking hobby and start thinking business...
Hobby expenses are not deductible, but if you can turn your photography hobby into a legitimate business, you can deduct the zoo tickets, magazine subscription, camera, and much more. Let's take this slow because you don't want to take deductions for which you do not qualify.
Three rules for deducting expenses:
- Expenses must be for a trade or business. Okay, but what makes something a trade or business? The IRS says "an activity qualifies as a business if it is carried on with the reasonable expectation of earning a profit." The last part is important. There must be a reasonable expectation of earning a profit. That means there must be a good chance you'll make more money with your venture than you spend. According to this definition, my four year old's lemonade stand may be more of a business than, say, the recent Cop Out movie. Still not sure if you have a hobby or a business? The IRS suggests you consider these factors:
- Does the time and effort put into the activity indicate an intention to make a profit?
- Do you depend on income from the activity?
- If there are losses, are they due to circumstances beyond your control or did they occur in the start-up phase of the business?
- Do you have the knowledge needed to carry on the activity as a successful business?
- Have you made a profit in similar activities in the past?
- Does the activity make a profit in some years?
- Expenses must be ordinary for conducting business. This means the expense is common and accepted in your particular trade or business.
- Expenses must be necessary for conducting business. A necessary expense is one that is appropriate for the business.
I was at the San Diego Zoo recently and spoke to half a dozen photographers snapping photos around the lion attraction. They all had a few things in common. They loved photography. They were creating something in the other 8 hours. They had other jobs. And they had a side photography business. I didn't get into their finances -- my daughter was more interested in the animals than the going price of a 8 x 10 lion photo -- but my guess is that they could all have deducted what they paid to get into the zoo, any photography magazines or journals they subscribe to, and even new cameras and equipment. If they can do it, there's no reason why you can't turn your passion into a business and deduct the expenses.
A few disclaimers and words of caution. I am not a CPA. Talk to your professional tax advisor regarding your own situation. Don't deduct expenses that are not legitimate -- the U.S. deficit doesn't need tax cheats. Keep detailed records. Read more about hobby and business expenses from the IRS. Don't try to feed the lions.
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(Camera image by TheDreamSky, CC 2.0)