Business vs. Hobby Tax Deductions

Depending on if you are pursuing a business or hobby, you may be eligible for certain tax deductions.

Westchester tax preparation experts at Herman & Company CPA’s have all the answers to your personal finance questions! People in general prefer to make a living doing what they love, which is often a hobby. At tax time, however, there is a difference between a business and a hobby. A hobby is an activity for which you do not expect to make a profit. If you carry on a business or investment activity from which you do not expect to make a profit, there is a limit on the deductions that you can take.

Income from a hobby, i.e., an activity from which you do not expect to make a profit such as a farm operated mainly for recreation, must be included on your tax return. You cannot use a loss from the activity to offset other income. All activities you do as a hobby, or mainly for sport or recreation, come under this limit. An investment activity intended only to produce tax losses for investors comes under this limit also. The limit on not-for-profit losses applies to individuals, partnerships, estates trusts, and S corporations; it does not apply to corporations other than S corporations. For more information on these entities, please contact our Westchester CPA firm.

I often get asked by my clients in Westchester County – from Scarsdale, Larchmont, Rye and beyond for advice on this.  Determining if you are carrying on an activity for profit is based on many factors including whether:

• You carry on the activity in a business-like manner.
• The time and effort you put into the activity indicate you intend to make it profitable.
• You depend on income from the activity for your livelihood.
• Your losses are due to circumstances beyond your control (or are normal in the start-up phase of your type of business).
• You change your methods of operation in an attempt to improve profitability.
• You, or your advisors, have the knowledge needed to carry on the activity as a successful business.
• You were successful in making a profit in similar activities in the past.
• The activity makes a profit in some years and the amount of profit it makes.
• You can expect to make a future profit from the appreciation of the assets used in the activity.