If you are currently earning or intend to earn a profit from a hobby, then you just might be able to deduct any expenses or losses related to that hobby from your income, which will help reduce the amount of money you pay in taxes.
Nonetheless, whether or not your hobby actually qualifies as a business isn’t exactly black and white, and deducting expenses for a hobby that does not qualify as a business can get you in huge trouble with the IRS.
This is why you must absolutely be sure you can prove that your hobby is a business so you can legally lower your tax bill.
In general, hobby businesses are run from the home and are only semi-recreational. It’s also often a labor of love rather than a consistent stream of income.
Top four tips you can use to prove that your hobby is a tax deductible business
Keep Detailed Records
First and foremost, you need to keep detailed records of all expenses and profits or losses from your hobby. In essence, if you hope to claim your hobby as a business, then you need to treat it like a business, and that means following good record keeping practices.
Do Your Hobby Full Time or Part Time
The IRS likes to go after people who write off their hobby against their primary source of income from their regular job if their hobby is not very consistent or only done sporadically. This is why that in order to prove your hobby is indeed a business, you need to do it full time or at least part time. The IRS will be far more likely to treat your hobby like a business if you do.
Write A Business Plan For Your Hobby
Another way to prove that your hobby is indeed a business is to write up a real business plan. Like any business plan, the plan for your hobby needs to include a statement on your vision for the business, start-up costs, your projected costs and profits, how you will market your business, and your expected competition.
Match Your Income With Your Losses
If your income from your hobby is exceeding your expenses, then the IRS will be far less likely to deny your hobby as a business. It’s only when you have a high amount of expense for your hobby with no profit to show for it that the IRS will come knocking on your door to complain.
Hobby or Business?
Ideally, you would keep your personal life and your business separate from one another. But if you do end up generating a fair amount of income from your hobby, then there’s no reason to not treat it like a business on your tax return so you can reap the tax benefits that come with it. It’s possible to save hundreds or potentially even thousands of dollars a year if you do so.