Hobby Expense Deduction

[ATSMAN]

From IRS Tax Tips 2019-85:

Allowable hobby deductions.
Taxpayers can only deduct ordinary and necessary hobby expenses:

• Ordinary expense is common and accepted for the activity.
• Necessary expense is appropriate for the activity.

Limits on hobby expenses.
Taxpayers can generally only deduct hobby expenses up to the amount of hobby income. If hobby expenses are more than its income, taxpayers have a loss from the activity. However, a hobby loss can’t be deducted from other income.

How to deduct hobby expenses.
Taxpayers must itemize deductions on their tax return to deduct hobby expenses. Taxpayers can look into this now to determine if they will itemize their deductions when they file their 2019 tax return next year. Expenses may fall into three types of deductions, and special rules apply to each type.

I thought you can't deduct on Sch A because misc. deductions subject to 2% haircut is gone??

What am I missing??

[kathyc2]

They sent a revised e-mail:

"If a taxpayer receives income for an activity that they don’t carry out to make a profit, the expenses they pay for the activity are miscellaneous itemized deductions and can no longer be deducted. The taxpayer must still report the income they receive on Schedule 1, Form 1040, line 21."

[Lion]

Yep, Updated Tax Tip 2019-85. Get your free subscriptions to IRS topics.

[New York Enrolled Agent]

They sent a revised e-mail:

"If a taxpayer receives income for an activity that they don’t carry out to make a profit, the expenses they pay for the activity are miscellaneous itemized deductions and can no longer be deducted. The taxpayer must still report the income they receive on Schedule 1, Form 1040, line 21."

Kathy - I know that quote is not yours.

I think it is still misleading in that the amount of income reported on line 21 should be better described as gross income (i.e. gross receipts less cost of good sold). Do you agree?

[kathyc2]

Kathy - I know that quote is not yours.

I think it is still misleading in that the amount of income reported on line 21 should be better described as gross income (i.e. gross receipts less cost of good sold). Do you agree?

It's pretty much the same language used in 1040 instructions, but then they send you to Pub 535 for a definition of what it is. I think gross income is just as misleading. Many not familiar with income statements would read it to be gross revenue.

I absolutely hate the hobby income accounts, and refuse to take on new clients with "farmettes".

[New York Enrolled Agent]

I think gross income is just as misleading.
.

I hear you but it is how the regulations for §183 read.

How about using gross profit? Think that would work better?

[RWG1950]

Regarding the reporting of hobby income, aren't the terms "gross income" and "gross revenue" the same thing for hobby purposes ?
Aren't taxpayers required to report every dollar of hobby income that they receive on line 21 - regardless of expenses incurred in producing the income ?

[Rapid Robert]

Regarding the reporting of hobby income, aren't the terms "gross income" and "gross revenue" the same thing for hobby purposes ?
Aren't taxpayers required to report every dollar of hobby income that they receive on line 21 - regardless of expenses incurred in producing the income ?

I agree with New York Enrolled Agent, COGS is used first to determine gross profit, whether or not the activity is for profit. In other words, even a hobbyist can deduct COGS before putting a number on line 21.

Even better, suppose your non-profit activity consists of selling, say, your own personal collection of books acquired over the years for personal use. This would be properly reported on Schedule D as LTCG, with expense of sale plus cost basis used to offset the sale proceeds (and of course, any sales at a loss would not be deductible).

[kathyc2]

Regarding the reporting of hobby income, aren't the terms "gross income" and "gross revenue" the same thing for hobby purposes ?
Aren't taxpayers required to report every dollar of hobby income that they receive on line 21 - regardless of expenses incurred in producing the income ?

No. Gross revenue or gross receipts (same thing, different wording) would be the total sales from hobby. Gross income or gross profit (same thing, different wording) is sales less cost of sales. This is the amount that should be on line 21.

From Pub 535:
Gross Income

Gross income from a not-for-profit activity includes the total of all gains from the sale, exchange, or other disposition of property, and all other gross receipts derived from the activity. Gross income from the activity also includes capital gains and rents received for the use of property that is held in connection with the activity.

You can determine gross income from any not-for-profit activity by subtracting the cost of goods sold from your gross receipts. However, if you determine gross income by subtracting cost of goods sold from gross receipts, you must do so consistently, and in a manner that follows generally accepted methods of accounting.

[ATSMAN]

Deducting COGS was never an issue. But now you can't deduct the "other expenses" such as mailing/bank/platform fees etc. Most of my clients that engage in hobby income generally sell through the online platforms and now receive the 1099-K.

[spanel]

Deducting COGS was never an issue. But now you can't deduct the "other expenses" such as mailing/bank/platform fees etc. Most of my clients that engage in hobby income generally sell through the online platforms and now receive the 1099-K.

If they are not engaged in a profit motive, I dont see the big deal about losing the deduction. In the big picture, they have a loss, what little they might be able to deduct on the tax return isnt going to change that fact. Either accept you have no profit motive and deal with or stop the activity that has no chance of making money, hence why it isnt on a sch C.

Chris

[kathyc2]

Deducting COGS was never an issue. But now you can't deduct the "other expenses" such as mailing/bank/platform fees etc. Most of my clients that engage in hobby income generally sell through the online platforms and now receive the 1099-K.

Curious as to what hobby would generate 20K in revenue and 200 transactions?

[ATSMAN]

Curious as to what hobby would generate 20K in revenue and 200 transactions?

Excellent observation. As you may know they issue the 1099-K under one SS# so any stuff that you, your family (personal stuff, hobby stuff etc.) are clubbed together. I have a client that sells quilts, knitted items etc . the stuff she sells from garage sales etc. Her husband picks up discarded lawnmowers, snow blowers, washing machines, fixes and cleans them up and put it right in his front yard for sale.

She has been getting a 1099-K every year since they started mailing them.