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Do you have a hobby or two that you enjoy? Imagine the potential if your hobbies start generating income that becomes half your annual income. Since the Tax Cuts and Jobs Act (TCJA) of 2017, the IRS has declared hobbyists can no longer itemize their expenses.
To qualify for tax deductions, you must turn your hobby into an official business. The IRS will consider your hobby a business if you do it for profit and depend on that income or have made a profit during the last three tax years. Here are 12 legal but surprising ways your hobby-turned-business could qualify you for tax deductions.
Startup Costs
Whether you’re starting a business or a hobby, you’ll likely need to make purchases to ensure its success. Startup costs can include supplies.
For example, if you want to make money from writing, you’ll need to purchase a laptop or computer. If you make jewelry as an income-generating hobby, you’ll need to buy beads, etc.
Educational Expenses
Investing in your education and skills is a great way to ensure you’re staying on top of your craft and keeping your skills up to date.
For example, if you’ve taken jewelry-making courses or workshops, these expenses could qualify for a tax deduction if you use the skills you gained to produce products or operate your business.
Auto Expenses
Did you know that if you used your vehicle for business-related purposes, you can claim the fuel costs as a tax deduction? So whether you use your time to deliver products, fetch supplies, or even meet with customers, these costs could be deducted from your income tax.
Just be sure to chat with an accountant to verify the limitations of a qualified deduction.
Business Expenses
If the IRS classifies your hobby as a business, your business expenses can also be qualified for tax deductions. This means you earn your livelihood from this income and have made a profit for the last three or five years, according to Turbotax.
Your business expenses could include things like supplies, such as home office supplies, stationery, and pens that are used exclusively for your hobby.
Membership Fees and Subscriptions
If you belong to any organizations or have any subscriptions related to your business, these may be counted as tax deductions.
For example, freelance writers may have subscriptions to services that assist them, like editing software, SEO software, invoicing software, and VPNs, which they need to run their business.
Travel Expenses
This is one of the most commonly used tax deductions, but it should be used carefully. The IRS will notice when business owners try to claim personal travel expenses as business expenses.
So, if you’ve been visiting shows, conventions, markets, and events related to your business, these may qualify for tax deductions.
Marketing
Marketing and advertising are crucial for any business or hobby because they are how you get your product out there, and today, there are plenty of marketing options.
If you’re paying money to advertise your business, whether online, through radio, or on paper, these costs may qualify as a tax deduction. However, thanks to the internet, plenty of free advertising options are available, like social media.
Insurance
Ensuring your business is successful means protecting your assets, and a good way to do this is to insure your business. Any insurance premiums related to your hobby may qualify for a tax deduction.
This includes things like business insurance, insurance for your property where the business is operating, and even auto insurance if you use it exclusively for your business. Just be sure to chat with a qualified tax advisor first.
Bad Debts
Many businesses encounter bad debt along the way, but it’s not all doom and gloom. Bad debt can be deducted as a business expense.
A very common example of bad debt is if someone fails to pay you for the product you’ve made. One good way to avoid this is using an e-commerce platform like Shopify, which has payment protection measures for businesses.
Professional Serves Hired
If you have hired professional services to help you with your business, these fees can be included as a business expense and, therefore, may qualify as a tax deduction.
These services could include accounts, tax practitioners, lawyers, and other professional services directly related to your business dealings.
Depreciation
This one may be surprising, but it is entirely legal. If you’ve been using your business equipment often, its value may depreciate over time, reducing your taxable income over several years.
For example, equipment like electronics and ovens can depreciate over time with wear and tear.
Interest on Loans and Taxes
The last way your business may qualify you for tax deductions is through interest on loans and taxes. For example, if you have taken out a business loan, the interest you may have been paying could be considered a tax deduction.
Even taxes paid on things used for your hobby could qualify as a tax deduction. Just make sure you have consulted a qualified tax professional.
The Purpose of a Budget and 11 Reasons Why You Need One
The primary purpose of a budget is to track your income and expenses. A budget also ensures your bills are paid on time, helps you plan for the future, helps identify any bad spending habits or areas where you could reduce your spending, and ensures that your spending reflects your priorities. By creating a budget and sticking to it, you can ensure your needs are met, your bills are paid on time, you get out of debt, and you meet your financial goals.
