Filing 1040: What is a Miscellaneous Hobby Expense?


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El Rojo
January 30, 2003, 12:48 AM
Hey yall, I was just messing with my tax returns on TurboTax and I noticed that under the Deductions part of the 1040, it says you can "deduct hobby expenses (limited to the total amount of hobby income you reported)". What does that mean? I am sure it doesn't mean since I spent $2000 on guns, ammo, and accessories in 2002 that I can deduct all of that money. However, I am interested and can't seem to find a definitive answer anywhere. Any tax pro's out there want to help out? Thanks.

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Beren
January 30, 2003, 07:35 AM
I am not a tax expert, but:

It sounds like if you made money selling things made as part of your "hobby", you may deduct expenses incurred, capped by an amount equal to your "hobby income."

Curious, I need to check that out.

Beren
January 30, 2003, 07:41 AM
Check with a tax consultant for the real scoop. A peek on Google turned up the following:

http://groups.google.com/groups?hl=en&lr=&ie=UTF-8&oe=UTF-8&threadm=B705E3C6.13F9D%25jrh%40airwaygraphics.com&rnum=1&prev=/groups%3Fq%3D1040%2Bdeduct%2Bhobby%2Bexpenses%26hl%3Den%26lr%3D%26ie%3DUTF-8%26oe%3DUTF-8%26selm%3DB705E3C6.13F9D%2525jrh%2540airwaygraphics.com%26rnum%3D1

Marshall
January 30, 2003, 08:21 AM
To deduct an expense it has to be an expense incurred directly related to income you are reporting during any given tax year.

A hobby, i believe, falls into the category of income received from a source or activity that you are not engaged in for profit. Or, income from a rental property that you engaged in for profit but you are not engaed in the business of renting property. Or, income from gambling winnings including lottery's, raffles, etc.

If you have income your are reporting from a hobby and wish to deduct expenses that were incurred directly related to that profit, read the intsruction carefully. Most of all don't take my advise, call an Accountant! I am not a beancounter.

And no, it doesn't mean what you mentioned.


IRS sec 535 Expenses (http://www.unclefed.com/IRS-Forms/2002/p535.pdf)

Dennis
January 30, 2003, 08:41 AM
The Infernal Revenue Service does not want people to be able to deduct the costs of their hobbies. For example:

- If you like shooting at the range, but derive no revenue from it, the IRS says you cannot deduct the cost of a non-revenue producing endeavor—it is only a hobby, not a business.

- If you occasionally generate revenue, the IRS wants to know about it and take (with the implied use of eventual force or deadly force) their “fair share.” Perhaps you charge someone for some instruction you give them. You got money—the IRS wants it.

- If you say you are a “business,” intending to make a profit, then you probably would use the Schedule C and report all your documented, legitimate expenses incurred in making the profit. However, to prove you INTEND to make a profit, you must make a profit most years.

(I’ve forgotten the rule. Must you make a profit every three out of five years? Since 1988 I’ve only had a loss one year when I made a major purchase that I could “expense” rather than depreciate over a period of years. My problem is not making a profit but making a large enough profit to cover family expenses! :D )

- If you do not make a profit for the required percentage of years, the IRS says you are engaging in a hobby. Then you state the income on the 1040 and, only if you itemize, you can deduct your hobby expenses up to the amount of the revenue you generated. That way you cannot deduct more expenses than what you generated in revenue.

- - - -

Having a (Schedule C) business is often a good move. Many personal expenses can become “incidental” activities to the business. For example, automobile expenses. Let’s say:

- I drive twenty miles to a customer or client. I drop off an invoice, solicit business, or otherwise engage in a legitimate business activity.

- I then drive five miles to do some personal shopping and then to another customer or client for more legitimate business.

- Then I drive twenty miles from the client back to my home.

My business is home-based—I do not have an office. I teach First Aid, CPR, CHL/CCW and some other subjects on-site either at the client’s offices or at several school districts (where I share revenue to pay for the classroom). Therefore, for my above travels, I can deduct forty miles of driving expenses. Some folks would prefer not to document the five miles personal expense so they can deduct the entire 45 miles. First, that is not legal or moral. Second, on the rare chance you are audited and caught, ALL your recordkeeping is then called into question. I keep my books legitimate; therefore, I only have to worry about revenue generation and documentation—not whether I will be caught “cheating” trying to save a few dollars. (Peace of mind also has a dollar value.)

I am not an accountant or qualified to give financial or tax advice. However, here is a url you might find helpful:

www.irs.ustreas.gov

EDIT: Marshall, looks like we were typing at the same time! :D

El Rojo
January 30, 2003, 08:55 AM
Yeah that is sort of what I caught when it mentioned income. Thanks guys. And I know you are not accountants so don't worry about my coming back later and being upset with you because I claimed $10000 in hobby expense!

Russ
January 30, 2003, 12:12 PM
I'm a CPA. Go to Internal Revenue Code Section 183 and Regulation 1.183.

It means that you cannot deduct expenses for hobby related activities in excess of monies you earned from them. If you won a gun competition and got $1,000 but spent $3,000 for supplies, etc., the most you could deduct is $1,000. You cannot go below zero.

IRS loves to go after horse breeders and trainers with this code section. Usually it takes many years to get a horse good enough to win money. In the meantime, the taxpayer may be taking losses for feed, training, etc. The IRS will come in and say this is a hobby and the taxpayer never really intended to make money on the activity. That way they can go back and make you pick up prior deductions as income.

It can be fought. Regulation 1.183 explains the items you need to prevail and have the activity treated as a trade or business in which case, you can deduct losses in excess of income.

It is a rebuttable presumption that if your business incurrs losses in 3 out of 5 consequtive years, that the activity is a hobby. In other words, if you have losses in 3 out of 5 consequtive years. In other words, the IRS presumes the activity is a hoppy and you have to rebut them and prove it is not. Not that easy.

If you get audited, it's up to you to prove the activity was a trade or business and not a hobby. For horse breeders, it's 5 out of 7 years.

I've seen more people screw up using Turbo Tax it's not funny. Be very careful with it. It's a fine program if you have some basic tax knowledge behind you. My own brother for example got himself audited by answering one of the interview questions wrong and taking an incorrect position. I told him I would do his return for free but he won't take me up on it . Oh well, his loss.

VirginiaHunter
January 30, 2003, 01:19 PM
Correct me if I'm wrong, but I thought people who persue reenacting, i.e. Civil War, could write off the expenses related to this activity. Uniforms, tents, clothing, are all tax deductable. Oh hi I'm new here ;-)

4v50 Gary
January 30, 2003, 01:28 PM
Sibil War folks join 501(c)3 educational groups. That's how they get in. Buy a rifled musket for mommy. ;) Rally 'round the flags boys, we'll rally once again!

Russ
January 30, 2003, 01:40 PM
Virginia Hunter,

There are no specific provisions to allow Civil War Re-enactors a deduction. However, 4v50 Gary has it. Most join tax exempt organizations, the most common of which is a 501(c)(3). This includes religious, scientific and educational organizations.

Russ

gun-fucious
January 30, 2003, 01:54 PM
Join the Church of The M.O.A. (http://www.thefiringline.com/forums/showthread.php?threadid=47260) and exempt yourself from
the burdenous sins of Hoplo-taxation

Lift up your ARMS America!
Can you feel the power?
Squeeze a round for Jesus!
Meditate on the circle of life.
Punch 3 perfect holes for Buddah!
Allah calls to you. Answer his call.
Vibrate the earth with his righteous thunder!

Russ
January 30, 2003, 02:56 PM
Not bad gun-fuscious :D

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