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! 
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- 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.
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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!
