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In making the distinction between a hobby or business activity, take into account all facts and circumstances with respect to the activity. A hobby activity is an activity not done for profit. This includes activities done mainly for sport, recreation, or pleasure. No one factor alone is decisive. You must generally consider these factors in determining whether an activity is a business engaged in making a profit:
- Whether you carry on the activity in a businesslike manner and maintain complete and accurate books and records.
- Whether you have personal motives in carrying on the activity.
- Whether the time and effort you put into the activity indicate you intend to make it profitable.
- Whether you depend on income from the activity for your livelihood.
- Whether your losses are due to circumstances beyond your control (or are normal in the startup phase of your type of business).
- Whether you or your advisors have the knowledge needed to carry on the activity as a successful business.
- Whether you were successful in making a profit in similar activities in the past.
- Whether the activity makes a profit in some years and how much profit it makes.
- Whether you can expect to make a future profit from the appreciation of the assets used in the activity.
You may find more information on this topic in section 1.183-2(b) of the Federal Tax Regulations.
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- You would include the money used to pay personal expenses in your gross business income when your business earned it.
- You wouldn't write off personal expenses as business expenses because they're not ordinary and necessary costs of carrying on your trade or business.
- Personal, living, or family expenses are generally not deductible.
- It's a good idea to keep separate business and personal accounts as this makes it easier to keep records.
- Some expenses, like expenses for your vehicle, can be for both business and personal purposes. You must divide these expenses between business and personal use.
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- Generally, reimbursed non-entertainment-related meal expenses are deductible if your business trip is overnight or long enough that you need to stop for substantial sleep or rest to properly perform your duties. You can figure all your travel meal expenses using either of the following methods:
- Actual cost. If you use this method, you must keep records of your actual cost.
- The standard meal allowance, which is the federal meals and incidental expense (M&IE) per diem rate. The GSA website lists these rates by location. Note that lower rates apply for the first and last days of travel.
- The deduction for unreimbursed non-entertainment-related business meals is generally subject to a 50% limitation. You generally can’t deduct meal expenses unless you (or your employee) are present at the furnishing of the food or beverages and such expense is not lavish or extravagant under the circumstances.
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Foreign per diem rates can be found at the U.S. Department of State website.
Non-foreign per diem rates for areas outside the continental United States (OCONUS), such as Alaska, Hawaii, Puerto Rico and U.S. territories can be found at the Defense Travel Management Office website. Continental United States (CONUS) per diem rates can be found at the U.S. General Services Administration (GSA) website.
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To deduct expenses related to the part of your home used for business, you must meet specific requirements. Even then, your deduction may be limited.
You must use part of your home:
- Exclusively on a regular basis as your principal place of business for a trade or business,
- Exclusively on a regular basis as a place where you meet or deal with patients, clients, or customers in the normal course of your trade or business,
- In the case of a separate structure which isn't attached to your home, exclusively on a regular basis in connection with your trade or business
- On a regular basis for storage of inventory or product samples for use in your trade or business of selling products if your home is the only fixed location of the trade or business,
- For rental use, or
- As a daycare facility.
Note: You don't have to meet the exclusive use test if you satisfy the rules that apply to storage, rental, or daycare use.
The simplified method is available to qualifying taxpayers. They can claim a prescribed rate of $5 per square foot (up to a maximum of 300 square feet) directly on Schedule C (Form 1040), Profit or Loss From Business (Sole Proprietorship), by entering the square footage of the home and square footage of the office in the applicable boxes to indicate their election to use the simplified method. For more information, see Simplified option for home office deduction and FAQs – Simplified method for home office deduction.
Note: You may not use the simplified method for rental use of your home.
Taxpayers who don't choose the simplified method, will continue to use Form 8829, Expenses for Business Use of Your Home to compute the expense allowable as a deduction on Schedule C (Form 1040).
If you use your home in your farming business, report your expenses on Schedule F (Form 1040). Partners report their unreimbursed partnership expenses on Schedule E (Form 1040). If you are a statutory employee (box 13 of Form W-2 checked), report your expenses using the same rules as self-employed persons on Schedule C (Form 1040).
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If you lease a car you use in business, you may not deduct both lease costs and the standard mileage rate. You may either:
- Deduct the standard mileage rate for the business miles driven. If you choose this method, you must use the standard mileage rate method for the entire lease period (including renewals).
- Claim actual expenses, which would include lease payments. If you choose this method, only the business-related portion of the lease payment is deductible.
Both of these deductions may be reduced by an “inclusion amount.”
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Periodic Ownership/Operation Costs - State and local governments may impose taxes and fees upon the ownership and operation of vehicles by a business, such as recurring registration charges and value-based assessments like excise or personal property taxes.
Generally, if you use a vehicle solely for business purposes you may deduct the entire cost of owning and operating the vehicle, including state and local taxes and fees. Under the 12-month rule, you may deduct these recurring taxes and fees as long as the right or benefit created by the payment does not extend beyond the earlier of (i) 12 months after the first date on which the taxpayer realizes the right or benefit; or (ii) the end of the taxable year following the taxable year the payment is made. For example, you can deduct your annually paid vehicle excise or personal property taxes. However, pre-paid multi-year vehicle excise or personal property taxes are deductible only in the year to which they apply.
Additionally, you may deduct Heavy Vehicle Use Taxes (HVUT) the Federal government imposes on an annual basis on the use of heavy highway motor vehicles with a taxable gross weight of at least 55,000 pounds. You must file IRS Form 2290 and pay the HVUT by the last day of the month following the month you first used the vehicle on a public highway. The tax year for the HVUT runs from July 1 to June 30.
Purchase Costs - State and local governments may impose taxes and fees in connection with the acquisition of a vehicle, such as initial registration charges, and excise or sales taxes. You should capitalize these amounts paid to purchase a vehicle used in your business.
Once you place the vehicle in service and use the vehicle in your business, you may recover the cost of the vehicle, including excise or sales taxes paid in connection with its acquisition, as a section 179 deduction for that taxable year or by taking annual depreciation deductions under section 168, including the additional first year (bonus) depreciation deduction under section 168(k).
Both the section 179 deduction and section 168 depreciation deductions for the vehicle may be subject to annual limitations (for example, passenger automobiles and certain trucks and vans are subject to annual limitations for the placed-in-service year and each subsequent tax year).
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You must first determine whether your agreement is a lease or a conditional sales contract. If the agreement is a lease, you may deduct the payments as rent. If the agreement is a conditional sales contract, you consider yourself as the outright purchaser of the equipment. You may generally recover the cost of such property used in a trade or business through depreciation deductions.
Whether the agreement is a lease or a conditional sales contract depends on the intent of the parties as evidenced by their agreement, which is read in light of the facts and circumstances when it was entered into. Determine the parties' intent based on the facts and circumstances that exist when you enter into the agreement. No single test, or special combination of tests, always applies.
However, in general, you may consider an agreement as a conditional sales contract (Rev. Rul. 55-540, 1955-2 C.B. 39) rather than a lease if one or more of the following conditions apply:
- The agreement designates part of each payment towards an equity interest that you'll receive in the property.
- You get title to the property upon the payment of a stated amount of "rental" payments required under the agreement.
- The amount you must pay to use the property for a short time is an inordinately large part of the amount you would pay to get title to the property.
- You pay much more than the current fair rental value for the property.
- You have an option to buy the property at a nominal price compared to the value of the property when you may exercise the option. Determine this value when you enter into the agreement.
- You have an option to buy the property for a small amount compared to the total amount you have to pay under the agreement.
- The agreement designates some part of the payments as interest, or parts of the payments are easy to recognize as interest.
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If you give business gifts in the course of your trade or business, you can deduct all or part of the costs subject to the following limitations:
- You deduct no more than $25 of the cost of business gifts you give directly or indirectly to each person during your tax year.
- If you and your spouse both give gifts to the same person, both of you are treated as one taxpayer.
- Incidental costs such as engraving, packing or shipping aren't included in the $25 limit if they don't add substantial value to the gift.
- For purposes of the $25 per person limit, don't consider gifts costing $4 or less that have your business name permanently engraved on the item and which you distribute on a regular basis.
- Any item that could be considered either a gift or as entertainment is generally considered entertainment and cannot be deducted.
- You need to have timely kept records that prove the business purpose of the gift as well as a description of the gift, the details of the amount spent and date of the gift.