Question

Hobby expenditures are deductible to the extent of hobby gross income.
Is this true or false?

Answer 1

Answer: True

Explanation:

A hobby is any type of leisure activity engaged in, that is not considered a business, according to the Internal Revenue Service. Youc can deduct expenses only to the extent that you have income from the hobby. This rule applies to individuals, S corporations, partnerships, estates and trusts.

The answer is applicable only for the years prior to 2018.

If you are talking about the year 2018 through 2025, you cannot deduct the hobby expenses.

Old rules:

Under the old rules that were in effect before the Tax Cuts and Jobs Act (TCJA), you were required to report all revenue for hobby activities on your tax return, and your allowable deductions from the activity were limited to that revenue. In other words, you could never have an overall tax loss from an activity that was treated as a hobby, even if you lost money. You were allowed to deduct hobby-related expenses that could be written off in any event, such as itemized deductions for allocable home mortgage interest and property taxes. Your other hobby-related expenses (limited to income) were claimed as a miscellaneous itemized deduction item. That means you got no write-off unless you itemized. And, even if you itemized, the write-off for miscellaneous deduction items was limited to the excess of those items over 2% of your adjusted gross income (AGI). The higher your AGI was, the less you could deduct. High-income taxpayers often found their allowable hobby activity deductions limited to little or nothing. Finally, if you were subject to the individual alternative minimum tax (AMT), miscellaneous itemized deductions for hobby expenses were completely disallowed for AMT purposes.

New rules

For 2018 through 2025, the TCJA suspends write-offs for miscellaneous itemized deduction items that, under prior law, were subject to the 2%-of-AGI deduction threshold. That change eliminates all deductions for hobby-related expenses, except for expenses that you can write off in any event, such as itemized deductions for allocable mortgage interest and property taxes. So, under the current law, you simply can’t deduct most hobby-related expenses for federal income tax purposes. As under prior law, you still must report 100% of hobby-related income on your tax return. As a result, it’s more important than ever to establish that a money-losing activity is actually a for-profit business venture that hasn’t yet become profitable.

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