The IRS & Your Hobby & Your Money

[Dr. Cranky]

It's that time of year again. That's right, it's time to pay those taxes.

I am wondering how many out there deduct their hobby expenses and what your rationale is for doing so?

For example, if you claim hobby related expenses, how do you make a claim for your expenditures, costs, etc . . .

Some folks are professionals in the field, so I imagine it's a lot easier. But how about those folks who contribute to magazines, etc . . . can those costs be deducted?

Just wondering what the steps are. Thank you in advance for your comments.

[Foxer]

The basic steps would be:

1. Pray you don't get audited!

2. Pray you don't get audited!

3.. Pray you don't get audited!

[gbdolfans]

Hey guys,

I am under the impression that unless you have your model building as a business,you can't deduct any expenses for it.That would mean having income to show it as a business.You can't have a business with all deductions and no income.

As stated above,you can always hope you don't get caught by the IRS.One of my coworkers hope she doesn't get caught.

[Dr. Cranky]

Thanks for the input, Mike and George.

But here's a scenario: let's say you do kit reviews, many folks here do, and so you buy new kits to keep reviewing. Some of the reviews you do for magazines and they pay you, etc . . . I think this is a perfect example of a legitimate expense/tax deduction, no?

[GrandpaMcGurk]

http://www.nolo.com/legal-encyclopedia/operating-losses-prove-hobby-business-30000.html

[Dr. Cranky]

Thanks for the link, Don. I think it's very interesting and useful information:

Deducting Hobby Losses From Your Income

An unprofitable business can be a tax shelter. So if you love what you're doing (as is usually the case in a hobby business), it might make sense for you to stick with your business even though it makes little or no money.

If you have another source of income, you may be able to use the losses from your hobby business -- including your expenses and depreciation on assets you purchase -- to offset your other taxable income. Deducting these losses can not only lower the amount of income on which taxes are owed, but also drop you into a lower tax bracket.

[Dr. Cranky]

The other thing I was going to say is that as a writer, I have experience doing something that makes me NO money, but I still deduct my losses., i.e, equipment (you know computer, pencils, paper, printer, etc.) and travel costs, etc . . .

Of course, it helps to have a good accountant who can keep you straight with receipts and all of the technicalities.

[Joe Handley]

I'm just waiting on my refund so I can buy a new daily driver with it

[Dr. Cranky]

That works, Billy Joe. Good luck, buddy.

[Draggon]

Interesting stuff here. My ex wife had a nail business that was more of a hobby than a business. She got to claim no profit and write off losses for five years. Then the IRS wrote her a letter and told her basically she should either show a profit or close the business.

[mikemodeler]

I have been a salesman for 16 years and my office is based in my home. That said, my accountant is reluctant to take any deductions for a home office as I do not have a single room dedicated to just my office, I do not have customers visit my home, and I typically spend less than 20% of my work time in my office. I have co-workers who go hog wild with deductions, everything from magazine subscriptions, cable TV, utilities, you name it and they try to deduct it! My theory is that it the little bit I may gain is not worth a sit down with the IRS (been there, done that, ain't fun!)

My brother-in-law works for the Federal Government, has for 40 years. 10 years ago they closed his office and sent him home to work from a home based office. He has never taken the home office deduction as he figures it isn't worth the hassle even though he spends 85% of his time in it and can justify it. It does funny things to your capital gains taxes when you sell your home because a certain percentage has been deducted for whatever time period and subject to different taxes.

The way I look at it is this- Unless I would be incurring huge expenses and receiving a big paycheck, what are the real advantages of running it like a business? Like Glenn mentioned, the IRS wants you to be profitable at some point.

[charlie8575]

Generally, if you show a loss for three of five years, the IRS will have you classify your business as a hobby. If, however, it becomes profitable later on, you can re-classify.

Whatever you do, save every scrap of paper, receipts, whatever. If you do have an audit, you have a responsibility to go prepared, and a right to defend yourself.

Also, remember if the earnings are less than $600/year, the IRS isn't going to be that concerned. They figure it's not worth the hassle of chasing for it. Keep the records anyway, just in case.

Charlie Larkin

[Dr. Cranky]

Again, thank you for the interesting and useful discussion . . . suddenly I've been wondering how many accountants are model builders.

[Scale-Master]

Don't overthink it, usually the flat deduction/allowance is more than your annual expenditures are. Go ahead and add up everything and you will likely see you spent less than that flat rate, I think it is $7000.00, but don't quote me. As one who has been in this hobby as a business for a decades, will share that only during a few years did I exceed that flat deduction.

[my66s55]

Yes, there is at least one accountant model builder on this board, but I get paid to answer the subjects in this post.

[Dr. Cranky]

LOL, Doug! Good for you.

[Brudda]

This is just a general rule,hobbys and collections are not deductions.Hobbys that turn into business are now taxed so deductions are applicable.I know this because I have done this in other adventures.Just be very careful and find a good CPA to get the right info. Heres just an example of how a hobby can turn into a irs mess. I just sold a gt-350 for a great some of money.I bought this car for 800 dollars in 1973.Now this is just a hobby. When I sold the car the irs said the car is now taxed because of the profits made.Sooo I had to show reciepts on the car to prove to them it was a hobby. Thank god I had every receipt for every part on the car.I even had receipts for my racing motels rooms,tools, eating and everything related to the car.When the irs saw I spent more than the car was worth then it was dropped. But what a pain! Sooo be careful,talk to a good CPA and everything will be great. My thought though....let sleeping dogs sleep.

[DanielG]

I don't know how things work south of the border but if Revenue Canada decides they want to look into your affairs you had better get professional help!