See Part I

Treatment of Hobby Expenses

If activity is deemed to be a hobby a loss cannot be deducted. In determining the allowable expenses, three tiers of expenses must be considered.

Tier 1.

These expenses are those that are allowed as an itemized deduction-medical, contributions, state and local taxes, mortgage interest, and casualties. These expenses are allowable with out regard to income from the activity. They are reported on Schedule A of Form 1040 and are deductible to the extent they exceed 10% of AGI for medical and casualties and are allowable only if total itemized deductions exceed the standard deduction.

Tier II.

These are business related expenses directly attributable to the activity. Examples are salaries, utilities, advertising, supplies, accounting and legal fees, travel, meals and entertainment (after 50% reduction), repairs and maintenance, insurance, office expenses. If any income remains after deducting business related expenses These are reported as miscellaneous deductions on Schedule A of Form 1040. Read More