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From Taxcut:

Hobby Expenses
Enter the amount of any expenses you incurred in 2008 in the course of your not-for-profit activities, but only to the extent you reported income from those activities.

In counting "total expenses" for this purpose, you must include items such as interest that would be deductible in any event.

If you have expenses in excess of income from an activity, your tax benefit would be greater if you could deduct them. To deduct expenses in excess of income, you must prove that you had a profit motive in engaging in the activity.

You will be presumed to have the needed profit motive if the activity actually showed a profit in 3 of the past 5 years (including 2008). (If the activity consists of breeding, training, showing or racing of horses, the reference is 2 of the last 7 years.)

If you can show the needed profit motive, either using this presumption or otherwise, you should report all of your income and expenses for that activity on Schedule C, not here.



So I wanted to ask FWF: How do you take advantage of this?

Thx,
-G

Member Summary
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If his AGI is $60,000, then his 2% threshhold is $1,200, which is $1,100 more than his allowable expenses (where allowab... (more)

Xnarg (Mar. 31, 2009 @ 9:13p) |

It has to do with this thread in the sense that if you didn't write your books or paint your paintings for money, they w... (more)

9000 (Apr. 05, 2009 @ 4:05a) |

It's section 1221(a)(3)(A) of the Internal Revenue Code.

LH2004 (Apr. 05, 2009 @ 7:39a) |

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One can't do a heck of a lot with it.

Suppose you have a hobby fixing computers for your neighbors. One of them runs a small office and has you stop by and setup his network and do general maintenance once a year or so. It's not a real business for you, just a hobby. However, the small business owner issues you a 1099. You have to report it because he did. For your hobby, you can deduct your expenses up to the amount of your income.

Some years ago this area was heavily abused. People would "start a business," show a loss for a couple of years, then start another business, and repeat the cycle.

Basically what they were doing was funding their personal activities with a business tax loss deduction. The IRS has really cracked down on that.

if you show horses as a hobby, and state a tiny profit for the first two years, can you deduct all losses for the next five years. for example, if i make 100 dollars for the first 2 years (100 each year), then spend 10,000 each year for the next five years, can i deduct 10,000 each of those five years? whats to stop someone who rides horses just for the fun of it from doing something like that?

See the answer above yours. You have to have a demonstrated profit motive. Your horse example would not qualify, because there is no way you could ever manage to make a profit spending $10,000 with only a few dollars revenue. The IRS sees through that sort of stuff quite readily. You'd be begging for an audit and you'd lose.

profit motive is very broad. One can intend to make a profit and still lose money, even in the first year. It's more about demonstrating to the IRS that it is intended to be a money making venture.

Getting away from the horses, I like baseball cards. The cost of aquisition of the baseball cards cannot be deducted because I eventually plan to sell them for more money. But if I try to sell them by renting a booth at a hobby show, then I can deduct the costs of getting to the show, the booth and the transaction costs of aquiring the inventory of baseball cards.

The IRS just gets annoyed if you lose money for too long, eventually you have to show some type of profit.

I have a job and a career that has nothing to do with investing. So...
I wish I could say investing was my hobby?

FW10001 said: I have a job and a career that has nothing to do with investing. So...
I wish I could say investing was my hobby?


You already can write off investment expenses, and you probably pay less in taxes on gains than you would on hobby gains (which I assume would be considered as part of your AGI).

To the OP, there really isn't much you can do legitimately with this. Trust me, I've thought about it. The truth is, as with most tax writeoffs, its whether or not it passes the smell test. The IRS usually considers intent as more significant than specific actions or writing. The aforementioned horse example is a clear instance of fraud. You don't have to have a profit, you have to have spending with the intent of a profit. If you claim you made $100 a year on your hobby, and then spend $10k the next year on the hobby, its going to be hard to claim that you're intending to make a *NET* profit after losing $10k.

Much like everything else, you can claim whatever you want, and if they don't audit it, its likely you'll get away with it. But my guess is hobby writeoffs are a red flag since there aren't that many legitimate ones.

It should also be noted that hobby expenses go on schedule A as an itemized deduction. If you don't itemize, no deduction for you. Also, just like gambling losses, hobby expenses are only deductible UP TO the amount of hobby income already included in your AGI. There is no way to get a net loss out of this.

I had a client once that misunderstood this, and deducted all his boat expenses because he said boating was his hobby (probably so), to the tune of over $8000. After I explained what the actual rules were, we had to amend his return to pay back the tax from the incorrect deduction. Oops.

hpmax said: FW10001 said: I have a job and a career that has nothing to do with investing. So...
I wish I could say investing was my hobby?


You already can write off investment expenses, and you probably pay less in taxes on gains than you would on hobby gains (which I assume would be considered as part of your AGI).
.


You did mean Expenses incurred while investing (e.g. transaction costs, broker fees), not the losses from selling stocks, right?

I meant investment expenses, but you can write off capital losses as well. If you purchase $10k of stock X, and $10k of Stock Y. Stock Y becomes worth $20k, Stock X becomes worthless, the loss in Stock X cancels out the gains of Stock Y and you owe nothing in capital gains taxes. If you only purchase Stock X, then you can write off $10k. However, you are limited to writing off $3k in excess of any gains for a given year, the remainder carries over. So you'd have to write it off as $3000 in year 1, $3000 in year 2, $3000 in year 3, and $1000 in year 4 (assuming no additional gains or losses after that).

hpmax said: I meant investment expenses, but you can write off capital losses as well. If you purchase $10k of stock X, and $10k of Stock Y. Stock Y becomes worth $20k, Stock X becomes worthless, the loss in Stock X cancels out the gains of Stock Y and you owe nothing in capital gains taxes. If you only purchase Stock X, then you can write off $10k. However, you are limited to writing off $3k in excess of any gains for a given year, the remainder carries over. So you'd have to write it off as $3000 in year 1, $3000 in year 2, $3000 in year 3, and $1000 in year 4 (assuming no additional gains or losses after that).Of course, one needs to consider whether the gains or losses are long- (held more than a year) or short-term.

In the former case, gains & losses are taxed at capital gains rates and in the latter at ordinary income rates.

What if you write 20 books or paint 50 paintings, but don't try to sell them, nor deduct any hobby expenses? Are such activities presumed to be for profit, even if you don't try to make any profit?

What if, 10 years later, you decide to sell the books or paintings, and get a lot more money than you thought you would? Is it capital gains?

Thanks for all the intelligent feedback. I'm not going to use this one, and I kind of wish it were removed from the books. It has little use, except abuse.

And why the hell are we subsidizing people's hobbies anyway?

-G

glenatuf said: ...And why the hell are we subsidizing people's hobbies anyway?...Um, we aren't.

9000 said: What if you write 20 books or paint 50 paintings, but don't try to sell them, nor deduct any hobby expenses? Are such activities presumed to be for profit, even if you don't try to make any profit?

What if, 10 years later, you decide to sell the books or paintings, and get a lot more money than you thought you would? Is it capital gains?
No and no. Those were very specific questions; I'm not sure if they were what you meant to ask. But those are the answers.

I guess mountain bike racing might work. I intend on profiting by winning races and I spend a bunch of money on my bike and traveling to events. I may win or may not place at all. I could easily incur a loss without profiting.

LH2004 said: 9000 said: What if you write 20 books or paint 50 paintings, but don't try to sell them, nor deduct any hobby expenses? Are such activities presumed to be for profit, even if you don't try to make any profit?

What if, 10 years later, you decide to sell the books or paintings, and get a lot more money than you thought you would? Is it capital gains?
No and no. Those were very specific questions; I'm not sure if they were what you meant to ask. But those are the answers.

What if you get a written estimate that they're worth $100 total, then 10 years later you sell them for $100,000? Isn't that the very definition of capital gains?

9000 said: LH2004 said: 9000 said: What if you write 20 books or paint 50 paintings, but don't try to sell them, nor deduct any hobby expenses? Are such activities presumed to be for profit, even if you don't try to make any profit?

What if, 10 years later, you decide to sell the books or paintings, and get a lot more money than you thought you would? Is it capital gains?
No and no. Those were very specific questions; I'm not sure if they were what you meant to ask. But those are the answers.
What if you get a written estimate that they're worth $100 total, then 10 years later you sell them for $100,000? Isn't that the very definition of capital gains?
The IRS will disallow all the "what ifs" one can come up with if the clear intention is tax avoidance.

They'll be there to tax the $100,000, but they aren't going to go along with a miraculous marketing plan that requires 10 years of aging for those books or paintings.

I love to sail. I get paid several days a year to crew/work on sailboats as a part time job. I also pay to belong to a sailing club, buy sailing gear, buy captains class books ect. Last year I net made money off of sailing but just barely. (Ie my pay for sailing as crew just barely paid for my sailing hobby) Since my paid crew income is reportable can I deduct the expenses of items like sailing club memberships, foul weather gear, ect??? Should I do so?

correction: I only made money off of sailing if you do not count going out after races for beer and pork nuggets in the total sailing expense. If you count sailing related socialization I lost money.

9000 said: LH2004 said: 9000 said: What if you write 20 books or paint 50 paintings, but don't try to sell them, nor deduct any hobby expenses? Are such activities presumed to be for profit, even if you don't try to make any profit?

What if, 10 years later, you decide to sell the books or paintings, and get a lot more money than you thought you would? Is it capital gains?
No and no. Those were very specific questions; I'm not sure if they were what you meant to ask. But those are the answers.

What if you get a written estimate that they're worth $100 total, then 10 years later you sell them for $100,000? Isn't that the very definition of capital gains?
No. The definition of capital gain is gain from the sale or exchange of a capital asset. A book you wrote (assuming you mean copyright or similar rights in the book, not the value of actual printings you happen to own) or a painting you painted (whether you mean copyright or the actual physical painting) is not a capital asset.

Again, this is a very specific point that doesn't seem to have much to do with the rest of this thread.

LH2004- Since you seem to understand this better then I do. Does my sailing count as a deductable hobby as I am making some money doing it?

Hobby expenses are deducted on Schedule A, so that means you have to itemize in order to claim them. Second, they're listed under miscellaneous deductions, so they have a floor of 2% of your AGI in order to be claimed. Also, they can't exceed the total you earned from the activity. This severely limits your ability to recover small amounts of hobby income.

If you could make a case for this being a business, then you could use Schedule C and deduct all expenses, but to be safe, don't exceed your income (i.e., show a profit of zero).

See: Expenses Subject to the 2% AGI Limit

Most miscellaneous deductions fall under this category. To figure out how much you can deduct, calculate 2% of your AGI and subtract that from the amount of eligible miscellaneous expenses. For example, if your AGI is $45,000, 2% of that is $900. Say you have $1,100 in miscellaneous expenses, you can only deduct $200 of that ($1,100 - $900 = $200). Qualified expenses can be broken down into 3 groups: unreimbursed business expenses, tax preparation fees and "other" expenses. Some common deductions subject to the 2% AGI limit are:

* employee business expenses, including subscriptions to magazines or trade journals related to your work, education expenses for maintaining or improving your job skills, small tools, union dues and expenses and uniforms and other work clothing not suitable for street wear
* travel, transportation, meals and entertainment expenses related to service you perform as an employee
* hobby expenses, not exceeding income you receive from the hobby
* legal fees related to the production of taxable income
* tax advice and preparation fees
* expenses related to the production of taxable investment income, such as interest and dividends.

--------------

See also:

Hobbies vs. Business

Hobbies are those activities that aren't pursued for profit. If your hobby shows a profit in at least 3 of the last 5 tax years, including the current year, the law assumes you're trying to make money. If you fail the 3-of-5-year test, then it's assumed the activity is a hobby. Either assumption can be overcome with evidence to the contrary.

lindylady, just to re-emphasize what Xnarg has said, the worst case is that your sailing is a hobby; if it is, then you can deduct your expenses up to the amount of your income from it, but as miscellaneous itemized deductions subject to the 2% floor. That floor means that, unless the expenses (or other miscellaneous itemized deductions) are pretty substantial, you'll get no actual benefit.

If it's not a hobby -- that is, it's done with the intent of making a profit -- then you can deduct all of your expenses, even if you have a net loss from the activity in a particular year. But you described the profitable part of your sailing activity as a "part-time job"; if it is actual employment (rather than self-employment, acting as an independent contractor for the people paying you), then your deductions are limited by the 2% floor anyway.

The other complication is, your personal sailing isn't necessarily the same activity as your part-time job sailing. For example, I make a profit from being a lawyer, and a loss from skiing. Occasionally, I have had skiing-related legal work. I might be tempted to argue that skiing/being a lawyer is all one activity, so that I can end up deducting my (in fact purely personal) skiing expenses against my lawyer income, but that is not likely to be respected by the IRS (or the courts, if I try to keep fighting after they audit me over this). If your personal, loss-making sailing really has nothing to do with the part-time job, then they are probably separate activities and you just have a pure loss from the part that's a hobby, with no income you can deduct the expenses against.

Here's what the Treasury regulations say about that (sec. 1.183-1(d)(1)):
Treasury said: In order to determine whether, and to what extent, section 183 and the regulations thereunder apply, the activity or activities of the taxpayer must be ascertained. For instance, where the taxpayer is engaged in several undertakings, each of these may be a separate activity, or several undertakings may constitute one activity. In ascertaining the activity or activities of the taxpayer, all the facts and circumstances of the case must be taken into account. Generally, the most significant facts and circumstances in making this determination are the degree of organizational and economic interrelationship of various undertakings, the business purpose which is (or might be) served by carrying on the various undertakings separately or together in a trade or business or in an investment setting, and the similarity of various undertakings. Generally, the Commissioner will accept the characterization by the taxpayer of several undertakings either as a single activity or as separate activities. The taxpayer's characterization will not be accepted, however, when it appears that his characterization is artificial and cannot be reasonably supported under the facts and circumstances of the case. If the taxpayer engages in two or more separate activities, deductions and income from each separate activity are not aggregated either in determining whether a particular activity is engaged in for profit or in applying section 183. Where land is purchased or held primarily with the intent to profit from increase in its value, and the taxpayer also engages in farming on such land, the farming and the holding of the land will ordinarily be considered a single activity only if the farming activity reduces the net cost of carrying the land for its appreciation in value. Thus, the farming and holding of the land will be considered a single activity only if the income derived from farming exceeds the deductions attributable to the farming activity which are not directly attributable to the holding of the land (that is, deductions other than those directly attributable to the holding of the land such as interest on a mortgage secured by the land, annual property taxes attributable to the land and improvements, and depreciation of improvements to the land).

I do want to point out that H&R Block (as quoted by Xnarg) is clearly wrong about one thing:
Xnarg said: If your hobby shows a profit in at least 3 of the last 5 tax years, including the current year, the law assumes you're trying to make money. If you fail the 3-of-5-year test, then it's assumed the activity is a hobby.In fact, there is no presumption that something is a hobby just because it fails to have a profit over any particular period. If you pass that test (or 2 out of 7 for some horse-related activities), then you are presumed to have a profit motive; if you fail it, there's no presumption either way. See Treas. reg. sec. 1.183-1(c)(1)(ii).

Thanks guys,
My understanding of what you are saying is the following.
As technically I am as crew an independant contractor of the company/boat that I crew for I could in theory deduct up to 2% of the following expenses
* employee business expenses, including subscriptions to magazines or trade journals related to your work, education expenses for maintaining or improving your job skills, small tools, union dues and expenses and uniforms and other work clothing not suitable for street wear- sailing gloves and foul weather gear ($150 ish last year),captains class and books ($45ish)
But that it would be almost impossible to argue any other expenses as a deduction. So the 2% on the $200-300ish I could maybe legally claim is probably not worth the hassle and even those expenses could be construed as for personal pleasure as well as for the job. I spent nothing that is totally only job sailing related and not fun sailing related.
Since it is mainly just a hobby I definatly can not claim any of my club dues or us sailig dues or sailing vacations or other larger expenses as a deduction. I spent and made about 2K total last year
Darn it!!
Oh well, I mainly sail for fun.

lindylady said: My understanding of what you are saying is the following.
As technically I am as crew an independant contractor of the company/boat that I crew for I could in theory deduct up to 2% of the following expenses
It's not 2% of the expenses, it's the expenses minus 2% of your adjusted gross income for the year (not less than 0). Or, if this is a hobby, then: (the expenses or the gross income from the hobby, whichever is less) minus 2% of AGI.

If your AGI was $50,000, then your first $1000 would be nondeductible, and anything above that would be deductible. And you would include other miscellaneous itemized deductions, like tax prep fees, in the calculation.

* employee business expenses, including subscriptions to magazines or trade journals related to your work, education expenses for maintaining or improving your job skills, small tools, union dues and expenses and uniforms and other work clothing not suitable for street wear- sailing gloves and foul weather gear ($150 ish last year),captains class and books ($45ish)I think that "street wear" is a loose term there. The question is whether they can be worn outside of the activity, and I would guess that there's a good likelihood they can.

I've read the above posts, but still am a little unclear - and i assume the answer is no, but can anyone tell me if I can deduct the following for the hobby tax:

Snowboarding Gear (board/bindings/pass) ~ 2k
Mountain bike gear (bike/shoes/helmet etc) ~ 2k
Laptops ~ 1.5k (i fix people's computers/networks as a personal hobby, but don't charge)

Pokesmot said: I've read the above posts, but still am a little unclear - and i assume the answer is no, but can anyone tell me if I can deduct the following for the hobby tax:

Snowboarding Gear (board/bindings/pass) ~ 2k
Mountain bike gear (bike/shoes/helmet etc) ~ 2k
Laptops ~ 1.5k (i fix people's computers/networks as a personal hobby, but don't charge)

No to all 3

Pokesmot said: I've read the above posts, but still am a little unclear - and i assume the answer is no, but can anyone tell me if I can deduct the following for the hobby tax:..What hobby tax?

i meant credit

Pokesmot said: i meant credit No, you didn't.

Pokesmot said: i meant credit What hobby credit?

Let me cut to the chase here. You can deduct anything you spend -- skis, sherpa salary, monster truck tires, speedboat gas, stunt plane repairs, hookers, blow -- that's not subject to a special disallowance rule. But you can only deduct it UP TO THE AMOUNT OF INCOME YOU HAVE FROM THE SAME ACTIVITY. If I go skiing for fun (not as a trade or business or profit-seeking activity), and spend $5000, and earn a total of $100, then I have $100 of income and I can deduct $100, but that deduction is subject to the 2%-of-AGI floor explained earlier in this thread. The other $4900 is nondeductible.

awesome that was exactly what i was looking for..

LH2004 said: Let me cut to the chase here. You can deduct anything you spend -- skis, sherpa salary, monster truck tires, speedboat gas, stunt plane repairs, hookers, blow -- that's not subject to a special disallowance rule. But you can only deduct it UP TO THE AMOUNT OF INCOME YOU HAVE FROM THE SAME ACTIVITY. If I go skiing for fun (not as a trade or business or profit-seeking activity), and spend $5000, and earn a total of $100, then I have $100 of income and I can deduct $100, but that deduction is subject to the 2%-of-AGI floor explained earlier in this thread. The other $4900 is nondeductible.If his AGI is $60,000, then his 2% threshhold is $1,200, which is $1,100 more than his allowable expenses (where allowable expense is less than or equal to the hobby income).

Therefore, in the above scenario, he deducts nothing unless he has significantly more miscellaneous deductions.

LH2004 said: 9000 said: LH2004 said: 9000 said: What if you write 20 books or paint 50 paintings, but don't try to sell them, nor deduct any hobby expenses? Are such activities presumed to be for profit, even if you don't try to make any profit?

What if, 10 years later, you decide to sell the books or paintings, and get a lot more money than you thought you would? Is it capital gains?
No and no. Those were very specific questions; I'm not sure if they were what you meant to ask. But those are the answers.

What if you get a written estimate that they're worth $100 total, then 10 years later you sell them for $100,000? Isn't that the very definition of capital gains?
No. The definition of capital gain is gain from the sale or exchange of a capital asset. A book you wrote (assuming you mean copyright or similar rights in the book, not the value of actual printings you happen to own) or a painting you painted (whether you mean copyright or the actual physical painting) is not a capital asset.

Again, this is a very specific point that doesn't seem to have much to do with the rest of this thread.


It has to do with this thread in the sense that if you didn't write your books or paint your paintings for money, they were a hobby. Lots of people paint as a hobby or write as a hobby.

So you're saying, even though you can buy and sell paintings painted by others and take capital gains on them, you can't do it if you painted them yourself? Is that a special rule somewhere, or just common sense?

9000 said: LH2004 said: 9000 said: LH2004 said: 9000 said: What if you write 20 books or paint 50 paintings, but don't try to sell them, nor deduct any hobby expenses? Are such activities presumed to be for profit, even if you don't try to make any profit?

What if, 10 years later, you decide to sell the books or paintings, and get a lot more money than you thought you would? Is it capital gains?
No and no. Those were very specific questions; I'm not sure if they were what you meant to ask. But those are the answers.
What if you get a written estimate that they're worth $100 total, then 10 years later you sell them for $100,000? Isn't that the very definition of capital gains?
No. The definition of capital gain is gain from the sale or exchange of a capital asset. A book you wrote (assuming you mean copyright or similar rights in the book, not the value of actual printings you happen to own) or a painting you painted (whether you mean copyright or the actual physical painting) is not a capital asset.

Again, this is a very specific point that doesn't seem to have much to do with the rest of this thread.
It has to do with this thread in the sense that if you didn't write your books or paint your paintings for money, they were a hobby. Lots of people paint as a hobby or write as a hobby.
Sure, but there just isn't anything special about income from a hobby. There are just special rules about deducting expenses.
So you're saying, even though you can buy and sell paintings painted by others and take capital gains on them, you can't do it if you painted them yourself?Yes. If it was a painting you purchased, it would not be a capital asset if it was held for sale to customers in the ordinary course of business -- that is, if you were a dealer and it was part of your inventory. Otherwise, it would be a capital asset.
Is that a special rule somewhere, or just common sense?It's section 1221(a)(3)(A) of the Internal Revenue Code.



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