Where do you report hobby income/loss on your 1040?

Question

Do you just include hobby income in GI and deduct allowed expense on your itemized deductions? I guess what I'm asking is there any additional forms to fill out for hobbies?

Answer 1

I also agree with jkhickey, but before converting to a legitimate business, keep in mind that profits from Schedule C are subject to SE tax a.k.a. Social Security and Medicare. You have to pay 15.3% of your profit for these things.

So, let's look at some advantages/disadvantages for sticking with hobby income:

Adv: profits are not subject to SE tax

Dis: you don't get credit for the amount of SE tax you paid (this could lower your Social Security benefits when you retire)

Dis: all hobby income goes on line 21, not just profits. This causes your Adjusted Gross Income to be high which hurts other things like increasing the 2% threshold

Adv: if you are already itemizing, and especially if you already have items in the "2%" category on Schedule A, your income tax will basically be only on the hobby profit.

Dis: If you don't itemize, you may end up paying taxes on only the hobby income and lose out on the hobby losses.

Adv: You don't need to fill out the complicated Schedule C and SE forms

Dis: If you have a net loss on your hobby (your costs exceeded your income), you will not be able to write it off against other earnings like you can with a business.

So, there are different reasons for leaning one way or the other. May I suggest doing your taxes both ways and seeing how it affects the bottom line.

At the end of the day, however, the decision must rest on realities, not tax advantages. If your business is legimately a hobby, then you should file it as a hobby. If it is a business, you can NOT call it a hobby. How do you know which it is? Check out the link I have attached. It is one of the better ones on the internet. You can Google "Business vs Hobby" for other links.

Jerry : So we're going to make the Post Office pay for my new stereo?
Kramer : It's just a write off for them.
Jerry : How is it a write off?
Kramer : They just write it off.
Jerry : Write it off what?
Kramer : Jerry all these big companies they write off everything.
Jerry : You don't even know what a write off is.
Kramer : Do you?
Jerry : No. I don't.
Kramer : But THEY do, and They are the ones writing it off.
Jerry : I wish I just had the last twenty seconds of my life back.
--Kramer and Jerry (The Package)

Answer 2

Hobby Income goes on Line 21 (Other Income) of the 1040.

Hobby Expenses (up to Hobby Income) are deducted on Schedule A - Misc. Deductions Subject To 2% of Income.

Remember, Hobby Expenses can not exceed Hobby Income.

Answer 3

Wayne Z is correct in his response.

My question to you is why not take it up a notch? If you conduct your operations as a business with the intent to make a profit, then you could deduct all income and losses on Schedule C. The benefit here is that your expenses are not limited to 2% and to the extent of income as in a hobby. The true test, however, is that is it a hobby or can you prove you conducted your activities as a business. One guideline is that you must show profit in at least 3 of the previous 5 yrs...

The choice is yours to continue, or open up your business. Many people legitimately turn their hobbies in to lucrative businesses by just changing a few elements. The planning potential is endless!

Answer 4

According to the IRS, there is no such thing as a hobby loss.
Your hobby income is reported as other income on the first page of your 1040 and your expenses - - only to the amount of the income - - go onto your schedule A. But don't forget, you need to be itemizing your taxes in order to deduct those expenses on schedule A.

Answer 5

I agree with jkhickey. nova_queen 28: According to the IRS there IS such a thing as hobby losses. The are not deductible, but they do exist.