Julia has always been passionate about photography. She recently sold several of her photos at a local art gallery and wants to know if she can deduct her expenses for tax purposes.
Julia needs to first establish whether her photography venture is a hobby or a business. The difference between the two comes down to profit: An activity that is pursued for profit is a business, and an activity that isn’t is a hobby.
If photography is determined to be a hobby, Julia can deduct her photography expenses up to the annual income her hobby generates. She will have to itemize deductions on her tax return to claim the deduction. Julia’s photography expenses can be grouped with any other miscellaneous expenses she has, but she will only be able to deduct the amount to the extent it exceeds 2% of her adjusted gross income.
Julia’s photography venture may, though, meet the IRS’s guidelines to qualify as a business. In that case, Julia will generally be able to deduct her business-related expenses (limitations apply) even if those expenses exceed her business income. An activity is generally considered profit motivated by the IRS if it shows a profit in three of the last five tax years, including the current year.
It’s important to determine whether an activity is a hobby or a business. It can help you decipher which records you should have for tax purposes.
Client Profile is based on a hypothetical situation. The solutions we discuss may or may not be appropriate for you.
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