tomato clown
Member
Just wondering who here claims their Aquariums on taxes as a "Hobby", also wondering if there are special forms needed or if it's just a basic save the reciept sort of deal?
Aquariums and Taxes?
- Thread starter tomato clown
- Start date
toyshika
Member
Originally Posted by Tomato Clown
Just wondering who here claims their Aquariums on taxes as a "Hobby", also wondering if there are special forms needed or if it's just a basic save the reciept sort of deal?
It is generally accepted that people prefer to make a living doing something they like. A hobby is an activity for which you do not expect to make a profit. If you do not carry on your business or investment activity to make a profit, there is a limit on the deductions you can take.
You must include on your return income from an activity from which you do not expect to make a profit. An example of this type of activity is a hobby or a farm you operate mostly for recreation and pleasure. You cannot use a loss from the activity to offset other income. Activities you do as a hobby, or mainly for sport or recreation, come under this limit. So does an investment activity intended only to produce tax losses for the investors.
The reason: the IRS has different rules for the deduction of hobby expenses and businesses expenses.
Most direct business expenses are fully deductible on Schedule C. Additionally, if the direct costs of doing business exceeds your income from the business, you can use the resulting loss to offset (reduce) other income reported on Form 1040.
Hobby expenses are not considered business expenses. They must be reported as a miscellaneous expense on Schedule 1040 Schedule A of your personal tax return. They are subject to the same 2 percent floor as other miscellaneous expenses on Schedule 1040 Schedule A (they can only be deducted to the extent they exceed 2 percent of adjusted gross income). Furthermore, they cannot exceed your income from the hobby.
If you consistently lose money in your business, the IRS could claim it is a hobby and require you to report the expenses as hobby expenses, thereby limiting their deductibility.
Avoid the trap
What criteria does the IRS use to distinguish businesses from hobbies?
The IRS generally will presume your activity is a business if you show a profit in 3 of the last 5 years including the current year. (Businesses involved with race horses have to show a profit in 2 of 7 years).
If your activity fails this 3-of-5 year test, you may still be allowed to declare your expenses as business deductions if you can prove a profit motive. Here are some of the key factors the IRS will look at:
Do you carry out the activity in a business like manner
How much time and effort do you devote to the activity
Do you have expertise in the activity
Are the losses due to circumstances beyond your control
Have you tried to increase the profitability of the activity by changing your methods of operation
Do you depend on income from the activity for your livelihood
Have you made a profit on similar activities in the past
Does the activity involve considerable work that could not be considered "pleasurable" (cleaning animal stalls, for instance)
When a business deduction is challenged on the basis of profitability, decisions are made on a case by case basis. But the more you ways you can prove your profit motive, the better.
If, for instance, you claim to be in business selling hand-painted decorative items, and the business fails the profitability test, the IRS would probably consider it a business if you have little or no other income, regularly work at the business, regularly have your items on sale at craft shows, craft malls, consignment shops or through other means, keep accurate and complete records of your costs, inventory and sales, have a separate bank account for your business activities, and make changes in operations on the basis of an analysis of financial data.
But if you don't work regularly at the business, don't keep good records, don't regularly offer your products for sale to the general public, use many of your products to decorate your own home or to give as gifts, and never analyze income and expenditures or make and carry out plans to increase income the IRS is likely to declare that your "business" is a hobby.
So in short, personally I don't claim it, because it's really a hassle, especially if they audit you. Of course, I have my own business on top of employment, so this would mess up my schedule c. I do taxes on the side as well, and have never met anyone who claims a hobby, because after awhile it gets tricky.
Good Luck!
Just wondering who here claims their Aquariums on taxes as a "Hobby", also wondering if there are special forms needed or if it's just a basic save the reciept sort of deal?
It is generally accepted that people prefer to make a living doing something they like. A hobby is an activity for which you do not expect to make a profit. If you do not carry on your business or investment activity to make a profit, there is a limit on the deductions you can take.
You must include on your return income from an activity from which you do not expect to make a profit. An example of this type of activity is a hobby or a farm you operate mostly for recreation and pleasure. You cannot use a loss from the activity to offset other income. Activities you do as a hobby, or mainly for sport or recreation, come under this limit. So does an investment activity intended only to produce tax losses for the investors.
The reason: the IRS has different rules for the deduction of hobby expenses and businesses expenses.
Most direct business expenses are fully deductible on Schedule C. Additionally, if the direct costs of doing business exceeds your income from the business, you can use the resulting loss to offset (reduce) other income reported on Form 1040.
Hobby expenses are not considered business expenses. They must be reported as a miscellaneous expense on Schedule 1040 Schedule A of your personal tax return. They are subject to the same 2 percent floor as other miscellaneous expenses on Schedule 1040 Schedule A (they can only be deducted to the extent they exceed 2 percent of adjusted gross income). Furthermore, they cannot exceed your income from the hobby.
If you consistently lose money in your business, the IRS could claim it is a hobby and require you to report the expenses as hobby expenses, thereby limiting their deductibility.
Avoid the trap
What criteria does the IRS use to distinguish businesses from hobbies?
The IRS generally will presume your activity is a business if you show a profit in 3 of the last 5 years including the current year. (Businesses involved with race horses have to show a profit in 2 of 7 years).
If your activity fails this 3-of-5 year test, you may still be allowed to declare your expenses as business deductions if you can prove a profit motive. Here are some of the key factors the IRS will look at:
Do you carry out the activity in a business like manner
How much time and effort do you devote to the activity
Do you have expertise in the activity
Are the losses due to circumstances beyond your control
Have you tried to increase the profitability of the activity by changing your methods of operation
Do you depend on income from the activity for your livelihood
Have you made a profit on similar activities in the past
Does the activity involve considerable work that could not be considered "pleasurable" (cleaning animal stalls, for instance)
When a business deduction is challenged on the basis of profitability, decisions are made on a case by case basis. But the more you ways you can prove your profit motive, the better.
If, for instance, you claim to be in business selling hand-painted decorative items, and the business fails the profitability test, the IRS would probably consider it a business if you have little or no other income, regularly work at the business, regularly have your items on sale at craft shows, craft malls, consignment shops or through other means, keep accurate and complete records of your costs, inventory and sales, have a separate bank account for your business activities, and make changes in operations on the basis of an analysis of financial data.
But if you don't work regularly at the business, don't keep good records, don't regularly offer your products for sale to the general public, use many of your products to decorate your own home or to give as gifts, and never analyze income and expenditures or make and carry out plans to increase income the IRS is likely to declare that your "business" is a hobby.
So in short, personally I don't claim it, because it's really a hassle, especially if they audit you. Of course, I have my own business on top of employment, so this would mess up my schedule c. I do taxes on the side as well, and have never met anyone who claims a hobby, because after awhile it gets tricky.
Good Luck!
lion_crazz
Active Member
Wow toyshika, you went into great detail! Thanks for posting.
I agree, I couldn't imagine claiming the fish keeping hobby on your taxes.
I agree, I couldn't imagine claiming the fish keeping hobby on your taxes.
tomato clown
Member
I've never claimed a hobby before myself, I was just wondering if anyone went through the drama and how the outcome was. I heard that some people do claim Aquarium expences as a hobby, but I've never met or spoke with one of them.