Article Posted on 06/27/2019
Hobby losses, which are defined as expenses in excess of income from an activity that the taxpayer cannot prove he or she intended to make a profit, are not deductible. Hobby expenses (limited to income) previously were limited in deductibility but classified as miscellaneous itemized deductions subject to the 2% of AGI limitation. Because the new law axed miscellaneous itemized deductions that category of expenses is not deductible.
So here is the deal. For 2018 through 2025, taxpayers who have income, but the activity does not rise to the level of a trade or business, are taxed on their gross profit. Operating expenses are denied. The income does not qualify for the 20% Sec. 199A (qualified business income (QBI) deduction), because the activity is not a trade or business.
Here is an example. Max enjoys photography. He is pretty good at it and sometimes he even sells his pictures at art and craft shows.
In 2017 he has sales of $4,000 and expenses travel, film, and equipment of $8,000. On his 2017 return he shows the $4,000 as income but since he itemized his deductions, he can deduct up to $4,000 of his hobby expenses.
That is different for 2018
Assume the same facts for 2018. Now he has $4,000 of income but he cannot deduct any of the expenses. Assuming he is in a 25% federal and 7% state bracket he will owe $1,280 in taxes on his hobby income.
This does not seem fair but remember… we don’t write the law.