Business vs. Hobby Tax Deductions

Westchester Tax Preparers Provide Tax Advice

Depending on if you are pursuing a business or hobby, you may be eligible for certain tax deductions.

Westchester tax preparation experts at Herman & Company CPA’s have all the answers to your personal finance questions! People in general prefer to make a living doing what they love, which is often a hobby. At tax time, however, there is a difference between a business and a hobby. A hobby is an activity for which you do not expect to make a profit. If you carry on a business or investment activity from which you do not expect to make a profit, there is a limit on the deductions that you can take.

Income from a hobby, i.e., an activity from which you do not expect to make a profit such as a farm operated mainly for recreation, must be included on your tax return. You cannot use a loss from the activity to offset other income. All activities you do as a hobby, or mainly for sport or recreation, come under this limit. An investment activity intended only to produce tax losses for investors comes under this limit also. The limit on not-for-profit losses applies to individuals, partnerships, estates trusts, and S corporations; it does not apply to corporations other than S corporations. For more information on these entities, please contact our Westchester CPA firm.

I often get asked by my clients in Westchester County Рfrom Scarsdale, Larchmont, Rye and beyond for advice on this.  Determining if you are carrying on an activity for profit is based on many factors including whether:

  • You carry on the activity in a business-like manner.
  • The time and effort you put into the activity indicate you intend to make it profitable.
  • You depend on income from the activity for your livelihood.
  • Your losses are due to circumstances beyond your control (or are normal in the start-up phase of your type of business).
  • You change your methods of operation in an attempt to improve profitability.
  • You, or your advisors, have the knowledge needed to carry on the activity as a successful business.
  • You were successful in making a profit in similar activities in the past.
  • The activity makes a profit in some years and the amount of profit it makes.
  • You can expect to make a future profit from the appreciation of the assets used in the activity.

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Any U.S. tax advice contained in the body of this website is not intended or written to be used, and cannot be used, by the recipient for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code or applicable state or local tax law provisions.