Many people invest time, money, and energy into activities they enjoy, only to wonder if their expenses are tax-deductible.
The truth is—you can only deduct hobby expenses if the IRS classifies your activity as a business.
Hobby or Business?
The Difference Matters
Under Internal Revenue Code §183, an activity not engaged in for profit—i.e., a hobby—limits deductions.
If the IRS decides your side project is a hobby, you cannot deduct losses against your other income.
Safe-Harbor: 3 of 5 Years
To receive a presumption that your activity is a for-profit business, you must show net profit in at least three out of the last five tax years—or two out of seven for horse-related activities IRS.
If you meet this test, the IRS must prove otherwise—but you’ll still need proper documentation.
Nine Factors the IRS Considers
Even if you don’t meet the safe-harbor test, the IRS will evaluate these nine factors under Treasury Regulation § 1.183‑2(b):
-
Business-like manner – accurate books, separate bank accounts
-
Expertise or advice – seeking professional guidance
-
Time and effort– personal commitment or staffing
-
Expectation of asset appreciation
-
Success in similar activities
-
History of profits/losses
-
Profit versus loss ratio
-
Financial status – dependence on income
-
Recreational motive – enjoyment does not automatically imply a hobby
Any one factor alone isn’t determinative—the IRS reviews the overall pattern.
Impact of the TCJA & extended by the OBBBA
The Tax Cuts and Jobs Act eliminated miscellaneous itemized deductions, including hobby expenses.
That means that even if your hobby produced deductions under prior rules, you cannot deduct them during this period—but the income remains taxable.
If It’s a Business…
-
All ordinary and necessary expenses (e.g. supplies, depreciation, insurance) can be deducted on Schedule C or other business forms.
-
You will pay self-employment tax on profits, which is normal for small business owners, & you may consider the S-Corp to mitigate the SE tax.
If It’s a Hobby…
-
Income must still be reported, but you cannot deduct expenses.
Best Practices to Maintain Business Status
-
Keep separate bank accounts and accurate records
-
Operate professionally—business plan, marketing, and formal operations
-
Make changes based on results—adapt strategy to improve profitability
-
Document time investment and expertise
-
Pay attention to profit trends, not emotional attachment
-
Consult an advisor early to confirm you’re meeting IRS expectations
Final Word
If you want IRS-compliant deductions, treat your venture as a business—not a hobby.
Build a record of profit intent, maintain proper documentation, and treat your project with professionalism.
That way you’ll retain deductions and avoid audits.