You can deduct hobby expenses up to the amount of your hobby income. Any expenses that exceed the income you made from your hobby are nondeductible personal losses. On the other hand, if you operate a business, your business losses can offset other income on your return. For an activity to be considered a business, it must have a profit motive.
The IRS presumes that you carry on an activity for profit if:
It makes a profit during at least 3 of the last 5 years, or
It makes a profit in at least 2 of the last 7 years, and your activities consist primarily of breeding, showing, training, or racing horses.
The IRS considers the following factors when deciding whether your activity is a business or a hobby: No one factor is decisive, and there are factors in addition to those listed that may be considered as well.
The manner in which the taxpayer carries on the activity.
The expertise of the taxpayer or his advisor.
The time and effort expended by the taxpayer in carrying on the activity.
The taxpayer's expectation that assets used in the activity may appreciate in value.
The success of the taxpayer in carrying on other similar or dissimilar activities.
The taxpayer's history of income or losses with respect to the activity.
The amount of occasional profits, if any, that are earned.
The financial status of the taxpayer.
The activity has elements of personal pleasure or recreation.
Hobby expenses are deducted as itemized deductions on Schedule A as part of your miscellaneous itemized deductions. Your total miscellaneous itemized deductions (including your total hobby expenses) would only be deductible to the extent they exceed 2% of your adjusted gross income.