Hobbies are expensive, but the United States tax system won’t pay for your hobby. The Internal Revenue Service has different regulations for hobbies and businesses and restricts what you can write off on your income taxes as hobby expenses. You can claim legitimate expenses as write-offs equal to your hobby income, but no more -- even if you lose a fortune. If you have no income from your hobby, you have no income tax write-offs.
A hobby that earns no income requires no IRS reporting. If your hobby generates some income, you must keep records of your income and claim it on Line 21 of IRS Form 1040. You must keep records and receipts to write off expenses, as well. As your hobby grows, you might consider turning it into a business so you can write off more expenses than you have in hobby income. If you make a profit three years out of the last five, the IRS presumes that your activity is for profit. If your hobby relates to horses, the IRS requires a profit for two out of the last seven years to call it a business.
Itemize deductions to get a tax write-off. Use Schedule A to report your expenses in the miscellaneous category. Miscellaneous expenses are limited to the excess of 2 percent of your adjusted gross income. In other words, the first 2 percent doesn’t count. If you earn $300,000 a year, you won’t be able to claim the first $6,000 of your miscellaneous expenses. You can write off legitimate expenses you incur pursuing your hobby equal to your hobby income. The IRS doesn’t care if it cost you $20,000 to make $10,000 in income on your hobby. You can only write off expenses up to the $10,000 income, and you cannot use a hobby loss to offset other income.
Order of Deductions
You must take deductions in a specified order to get a write-off for hobby expenses. Category 1 includes personal and business deductions, such as mortgage interest, taxes and casualty losses. IRS regulations allow most Category 1 deductions in full. Category 2 deductions don’t adjust the basis of property and include your hobby or business expenses, such as wages and utilities. You can only write these off if your gross income from the hobby exceeds the deductions from Category 1. Category 3 deductions affect the property basis and include depreciation and amortization. You can only take Category 3 write-offs if you have gross income that exceeds the deductions from Category 1 and 2.
If you made enough income from your hobby to get to Category 2, you’ll write off your hobby expenses on Schedule A, Line 23, as these are expenses you incurred to produce your income claimed from the hobby. Use IRS Publication 529 and Publication 535 for guidance. Publication 535 is entitled “Business Expenses,” but has a section on not-for-profit activities that explains the categories and gives an example of how to take the allowed deductions. Publication 529 details regulations for miscellaneous expenses. Common write-offs include office expenses, legal fees and price guides or books that you replace every year.