Taxpayer asks:
I run a hiking group online, and lead regular events with about $25 expense for each and an annual subscription to meetup and admin supplies.
Can this be a hobby tax deduction? I don’t make a profit, but sometimes get a contribution.
Taxgirl says:
It sure sounds like a hobby at this point. Any income that you receive should be reported as “other income” on line 21. Any expenses related to the group should be reported on your Schedule A as an itemized miscellaneous expense.
If this turns into more than a hobby at some point, then you’d report your activities (income and expenses) on a Schedule C.
Like any good lawyer, I need to add a disclaimer: Unfortunately, it is impossible to give comprehensive tax advice over the internet, no matter how well researched or written. Before relying on any information given on this site, contact a tax professional to discuss your particular situation.
Have a question? Ask the taxgirl! – Now on Facebook!
Taxpayer asks:
I saw on twitter that you ran a race this year so maybe you can help me. I run a number of races throughout the year and I occasionally win some money. My friend told me that I have to include that money on my taxes. Can I deduct the cost of the entry fee against the money that I won?
Taxgirl says:
Yep, I ran my first race last year. It was the Rothman 8k as part of the Philadelphia Marathon. I am not a serious runner but I had a respectable finish. Actually, I was just glad to finish! 
As to your question, yes, your friend is right. You must report your winnings on your income taxes.
Here’s the tricky part: you must decide if your running is a business or a hobby. Since you said that you ran “a number of races” and only “occasionally” win some money, it sounds as though you run as a hobby. If running – or any other sport – is your hobby, then you would report winnings as “other income” (line 21 on your federal form 1040).
There is some good news. You can claim deductions against your winnings but only if you itemize. You would include your related running expenses as “miscellaneous itemized deductions” on your Schedule A (not on a Schedule C, that would only apply if running was your business). Expenses could include your entry fees, your running shoes and any other expenses which are directly related to running. Be aware that those miscellaneous itemized deductions are limited to those in excess of 2% of your AGI (adjusted gross income). For example, if your AGI was $40,000, you could only deduct expenses which were more than $800 (2% of $40,000). If you paid $1000 in entry fees and running shoes, you could actually deduct $200.
There are other limitations. If you treat running as a hobby, your deductions are limited to the amount of your winnings. Additionally, you can’t carry excess deductions forwards or backwards. So, if you’re like me and you pay an entry fee to run but don’t win anything, you can’t properly claim any running-related deductions. But that’s okay – I’m only running because I like it (so it’s a hobby). And for the shoes.
How can you tell if running is a hobby or a business for you? The IRS looks at a number of factors. In this case, there are two big factors which likely make running a hobby for you: your motive and your winnings. The IRS assumes that you’re in business to make money. It sounds, from your post, as if you run because you enjoy it and not to make money. There’s nothing that says that you can’t enjoy your business, but if you’re running primarily because you like it and not to make money as your main motive, it’s likely a hobby. Additionally, I’m guessing that you haven’t grossed more than you’ve spent for most of the last five years – the IRS assumes that a business will eventually make a profit. For more on the hobby rules, see my prior post about hobby income tests and Mary Kay.
There you go. Happy running!
(Psst. I plan to run a 5k on Mother’s Day as part of the Susan Komen Foundation Race for the Cure. If you’d like to follow my team’s progress or make a donation, you can visit our team page. It’s called Team Joye – in honor of my grandmother who had breast cancer.)
Like any good lawyer, I need to add a disclaimer: Unfortunately, it is impossible to give comprehensive tax advice over the internet, no matter how well researched or written. Before relying on any information given on this site, contact a tax professional to discuss your particular situation.
Have a question? Ask the taxgirl! – Now on Facebook!
At my BlogHer session on blogging and tax, I raised the issue of hobby loss rules. This is an incredibly important matter not only for bloggers but others who work in small or home businesses. Just ask Brenda Konchar.
Brenda Konchar, a Mary Kay Cosmetics representative, reported her Mary Kay activity as business income; the IRS disagreed. Konchar took her case to the Tax Court and lost.
So what? What does it mean?
Here’s the scoop. If you earn income in the pursuit of a hobby, you can offset the income with deductions. You cannot claim deductions that exceed your income – there’s no loss for a hobby.
However, if you earn income in the pursuit of a business, you can not only offset the income with deductions, you can carry any losses forward. This can be huge for new businesses.
Brenda Konchar had deductions which exceeded her income and reported net business losses for the years 1996 through 1998. The IRS disallowed the losses, claiming that Konchar’s activities constituted a hobby. As a backup, the IRS claimed that even if she were operating a business, her expenses were not properly business expenses.
The Regs offer a number of factors to consider when determining whether a taxpayer is engaging in a business or a hobby.
The most important test is the profit motive. The IRS considers that you are engaging in a business when it is your intention to make money. You should be able to demonstrate that you have made a profit for at least three of the last five tax years.
Of course, it isn’t a given that all legitimate businesses will make a profit. So the IRS gives you another bite at the apple. They consider a number of factors, including:
1, Whether you run your business as a business. Sounds simple, right? This includes keeping good records and promoting your business.
2, How much time and effort you expend in the activity. It should go without saying that only spending minimal time and effort on your business sends a message that you’re not so serious about it.
3, Your level of expertise. How much do you know about your business?
4, Your track record. What kind of success or failure have you had in other similar endeavors?
5, Your financial picture. A bona fide business is generally something that a taxpayer relies upon to make a living.
6, Whether you continue to change your business practices in order to make money. When things aren’t going so well in business, business owners switch gears. As your financial picture changes, your business practices should, too.
7, The nature of your losses. All start up businesses expect a few bumps at the beginning. However, continuous losses that may be within your control to change would not be acceptable in a bona fide business.
8, Whether you expect the value of your business to grow. This includes accumulating appreciating assets.
9, How much fun you’re having. Oh yeah, the IRS looks at whether you enjoy yourself. There’s nothing wrong with liking what you do – but if you like it to the exclusion of working at it, you’re going to raise some eyebrows.
So where did Brenda Konchar go wrong? She didn’t operate her Mary Kay activities like a business. She didn’t effectively promote the business – she didn’t even have business cards – and most of her customers were family and friends. She mixed her business assets with her personal assets. She lost money year after year and made no substantial steps to make changes. As a result, her business losses were disallowed.
Here’s the lesson to be learned: if you’re going to operate a business, treat it like a business.
But there’s another lesson to be learned, too. Every endeavor doesn’t have to be a business. If you enjoy selling Tupperware or Mary Kay to friends and family, if you like blogging because you just like putting your thoughts “out there”, if you sell an occasional craft item simply because it feels good, keep on doing things the way you’re doing them. While it’s important to treat a real business like a business, you don’t have to ramp up your hobby activities if your heart isn’t in it.
Remember, the tax tail shouldn’t wag the dog. Choose your path and the tax consequences will follow, not the other way around.
For an interesting perspective on the franchise side of Mary Kay Cosmetics, check out Sean’s series.
Taxpayer asks:
I am a driver for a FedEx contractor, and I just recieved my 1099-misc form from my boss(the contractor) and I have no clue as to what to do from here. In the past, my jobs were paid by hourly wage and I received a W-2 for those. This is totally new to me, and I need to know what information I need in order to report my income.
Taxgirl says:
I have two answers for you, actually.
The first is my generic 1099 answer. If you receive a 1099, you would report that in one of two places on your tax return. If the money was generated from a hobby, you would report it as “other income” on your federal income tax return. If the funds were generated from self-employment (i.e. your own business) as it sounds like yours is, you would report the information as stated on the 1099 on your Schedule C.
For more information on hobby and loss rules, see my prior post about deductions and my guest post on Problogger.
My second answer is to make sure it’s appropriate that you receive a 1099. This is not a determination that is made by the payor – it is a matter of law. It sometimes feels like a good idea to receive a 1099 but keep in mind that you might be missing out on benefits such as health care and stock options that you would otherwise be entitled to as an employee; also keep in mind that you will have to pay self-employment tax on your wages which means you pay the entire Social Security and Medicaid remittances. When you are classified as an employee, your employer is responsible for paying one-half of those taxes.
Since you mentioned that you are a driver for a FedEx contractor, it raised a bit of a red flag with me. FedEx is in the midst of a lot of litigation right now concerning drivers and potential misclassifications of employees as independent contractors. I would suggest that you contact a tax professional to discuss your circumstances and make sure that you’re being classified properly.
Like any good lawyer, I need to add a disclaimer: Unfortunately, it is impossible to give comprehensive tax advice over the internet, no matter how well researched or written. Before relying on any information given on this site, contact a tax professional to discuss your particular situation.
Have a question? Ask the Taxgirl!
