Q. I have a real passion for photography and if I say so myself, I’m pretty good at it. I’ve had a few nature scenes published in magazines and friends and family have hired me to document special events. The money I make is insignificant but my equipment is pretty expensive. A friend suggested that I turn my hobby into a business so I can deduct all of my equipment and other expenses. My husband’s income is pretty high so could this help our tax situation and if so, how do I go about declaring my hobby as a business?
A. The Internal Revenue Service has some guidelines it uses to determine if your business is just a hobby. When you have expenses or losses connected with an activity that is deemed a hobby, any tax benefit from the loss is very limited. Any deductions will be itemized deductions and therefore will only be of benefit if they and your other itemized deductions total more than the standard deduction. For tax year 2016, the standard deduction for those married filing jointly is $12,600. This type of deduction is also a “miscellaneous” itemized deduction, which means it can only be deducted to the extent that it exceeds 2 percent of your adjusted gross income. Also the deductions you can take are limited to your income from the hobby. So, losses from a hobby will not provide any reduction in taxes from other sources such as your husband’s income.
If you can qualify your photography as a business you will be able to deduct ordinary and necessary expenses from taxable income including your husband’s income.
Example: You have $10,000 in income from your photography services and publications and equipment and travel expenses of $25,000 for a net loss of $15,000. If you don’t meet the business definition, the $15,000 net loss can’t be deducted, the $10,000 of income is taxable and the $10,000 of expenses equal to the income is a miscellaneous deduction to the extent it exceeds 2 percent of your AGI. Using the above scenario, if you take steps to have the IRS deem that your photography activities are a business and not a hobby your tax situation will improve. As a business owner you will be able to deduct the total amount of your losses against all income sources, including that of your husband.
The following are some of the factors the IRS will consider when making the determination as to whether your activities are a hobby or a business: time and effort put into the activity indicating an intention to make a profit, if the activity has earned a profit for three of the past five years it is presumed to be a for-profit business, if the activity is depended on for income, if the activity is conducted in a business-like manner (having a business plan, accounting procedures and business stationery will help with this), if you have expertise with respect to the activity and if you review your processes to improve profitability.
You may want to meet with a tax professional and/or contact the Small Business Administration for more information.
Holly Nicholson is a certified financial planner in Raleigh. She cannot answer every question. Reach her at askholly.com or P.O. Box 97128, Raleigh, NC 27624