Deducting Hobby Expenses on my Federal Income Taxes?

Question

So here is my situation in a nutshell. My wife does theater productions as a hobby with no reasonable expectation to make a profit on the enterprise. She does, however, sell tickets with the intent to cover the expenses and generally only charges enough to break even.

So she had about $3k in ticket sales last year which didn't quite cover expenses. I'm not looking to deduct the entire loss. I just would prefer that since we didn't actually have any net income from the whole affair that I don't incur a tax liability.

So here is the problem.The deduction for hobby expenses (Misc income) is limited to 2% of AGI threshold. So only the expenses in excess of that limit can be deducted, which is way more than the $3k in expenses. So what that means is the entire $3k in revenue is treated as pure profit and taxable to the tune of roughly $900 on a hobby that LOST money in the year. I'm not trying to use the loss to offset other income, but it seems patently unfair that I have to pay $900 in taxes on a hobby that not only didn't generate income, it COST me money on aggregate.

Given that I don't expect to make money on this hobby any time in the future I don't think I can recharacterize it as a business to help myself out. Is there anything else I can do to avoid this $900 hit on my income taxes on phantom profits?

Answer 1

I suggest to start charging slightly more than needed to cover expenses. All you need is to show profit. It doesn't have to be significant - a couple of hundred of dollars of consistent yearly profit should suffice to show a profitable business.

Then you can deduct on Schedule C all the related expenses.

The caveat is that the profit (after the deduction of the expenses will be a bit smaller) will be subject to not only income tax but also the self-employment tax. But at least you'll pay tax on profit that is not entirely phantom.

I remember suggesting you getting a professional consultation on this matter a while ago. You should really do that - talk to a EA/CPA licensed in your state, it may be well worth the $100-200 fee they'll charge for the consultation (if at all...).

Answer 2

Does your wife perform solo or in association with other actor/actresses and other volunteers?

The latter arrangement sounds more like an unincorporated association or a partnership, which might be a bit freer to match the revenue and expenses.

By grinding through the proper procedures, it might be possible to get official non-profit status for it, as well.

Ask a professional.