J.K. Lasser's Your Income Tax 2013: For Preparing Your 2012 Tax Return

40.10 Deducting Expenses of a Sideline Business or Hobby

There is a one-way tax rule for hobbies: Income from a hobby is taxable as “other income” on Form 1040; expenses are deductible only to the extent you report hobby income, and the deduction is limited on Schedule A by the 2% adjusted gross income (AGI) floor for miscellaneous itemized deductions. Hobby losses are considered nondeductible personal losses. A profitable sale of a hobby collection or activity held long term is taxable as capital gain; losses are not deductible.

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Planning Reminder

Hobby or Sideline Business

The question of whether an activity, such as dog breeding or collecting and selling coins and stamps, is a hobby or sideline business arises when losses are incurred. As long as you show a profit, you may deduct the expenses of the activity. But when expenses exceed income and your return is examined, an agent may allow expenses only up to the amount of your income and disallow the remaining expenses that make up your loss. At this point, to claim the loss, you may be able to take advantage of a “profit presumption” (40.10), or you may have to prove that you are engaged in the activity to make a profit. If you have more than one business activity, you may be able to aggregate them to show that you have an overall profit motive.

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How to deduct hobby expenses.

If the ...