With less than two weeks before the conclusion of the personal income tax filing season, we need all the answers we can get. Here is some good information on handling hobby income and expense, courtesy of Bill Nemeth, President Georgia Association of Enrolled Agents.
Q: I listened to you on WSB radio today and a couple of weeks ago. Your topics were most interesting and a great need to the community of listeners. However I did not hear anyone with the topic of hobbies discussed.
I have a small hobby of making functional pottery and participated in a couple of festivals during the year. The amount of income was not large, but I want to report the income correctly on my 1040 form. I assume that I report the income as “other income” on the 1040 form; is there a line on a form for the expenses that I occurred during the year for materials, supplies, etc.?
My hobby is not a business and all the references I can find describe business income and expenses. One day I hope to progress into a business, but not at this point. Someone told me to list the expenses in the miscellaneous section which would have to be greater than 2% of the gross income in order to be deducted, right?
You mentioned on the radio program that you were open to emailed questions. I so very much appreciate your guidance and expertise with these questions. Thank you for your time and assistance to explain as related to the hobby topic.**
A: Thank you for being a listener.
You have asked an excellent question. Here is a good explanation.
On line 21 of your 1040, you will report your NET Income:
Net Income = Gross Income (your total sales) less the cost of goods sold (raw materials, packing material, boxes to ship product in, etc). Be sure to include any freight charges in the cost of your materials (you buy special clay for $50 and pay an invoice for $65 which includes $15 shipping, your total cost for materials is $65).
If you incur additional expense like show expenses, liability insurance or machinery (potters wheel), you then have to perform some math to determine if you can deduct the expense associated with these expenses as the example illustrates. The other part of the calculation is where to deduct these allowable expenses (Sch A under Non-Reimbursed Business Expenses subject to the 2% floor).
Be sure to save your receipts in case the tax authorities every question your activity (save for 4 years).