Oregon Tax Consultants Practice Exam

Under what condition can you deduct hobby expenses?

1. If you have no hobby income

2. If you itemize on Schedule A

3. If you are a business owner

4. If you take the standard deduction

The correct answer is: If you itemize on Schedule A

The ability to deduct hobby expenses is linked to the requirement that the taxpayer itemizes deductions on Schedule A. Under the current tax law, hobby expenses can only be deducted to the extent that they exceed hobby income, and only if the taxpayer is itemizing deductions. This is because hobby-related expenses cannot be claimed as a ordinary business expense unless the activity is recognized as a business, which requires a profit motive. When a taxpayer itemizes their deductions, they can include hobby expenses as part of their total deductions, which might provide some level of tax relief. However, it is important to note that hobby expenses are subject to a 2% limitation of adjusted gross income (AGI), which means they will only provide a benefit if the total itemized deductions exceed the standard deduction. In contrast, having no hobby income does not allow for any deduction of expenses, nor does being a business owner automatically apply to hobby expense deductions unless the activity is deemed a business. Taking the standard deduction similarly does not allow for hobby expense deductions, as they can only be considered in the context of itemized deductions. Thus, the correct condition for deducting hobby expenses is that the taxpayer must itemize on Schedule A.