A friend of mine who bracket drag races as a hobby said his tax preparer helps him to deduct some of his expense in what he said the tax preparer called "hobby expenses". Do we have any tax experts here that can explain this better. I shot some matches last year and won a total of $10.00. My expenses are around 3000/00 for the year. Is it the same as gambling?    

I'm a CPA, and USED TO do taxes a few years back.

AS I recall...

"Hobby expenses" are NOT deductible.

Now, you can claim that you are in business, and deduc expenses greater than your income. BUT, in order for the IRS to recognize this activity as a business, it must be engaged in "for a profit."

Easy enuf to prove, right???? NOT TO THE IRS. The IRS defines "engaged in for a profit" as a business that actually SHOWS a taxable profit in 3 out of any 5 consecutive years.

Were you to dedust these expenses, and NOT meet that rule, the IRS will disallow the deductions, and come back at you asking for the back taxes PLUS penalty and interest. that would be FIVE YEARS of accumulated interest, and could exceed the actual tax by a multiple of 3 to 5 times the tax. OUCH.

You friends tax preparer is probably doing some creative accounting to get those deducted.

That said, here's theule I live by....

If ANY expense could reasonably be interpreted as deductible BY A REASONABLE PERSON, go ahead and deduct it. make the IRS come back and prove otherwise. IRS regs are VERYconfusing, and subject to interpretation. And as we all know, GOOD PEOPLE can disagree on the interpretation.

One piece of advice, tho - don't spend the tax savings. Make sure you've got the money to repay the IRS, should they come looking for you.

I was going throught the TurboTax interview and it asked for "Hobby Expenses" also... ??? If it's not deductable, why would TT ask for it? I'll have to re-install it and see what changes if I put numbers there.

Well, here's the rules, right from the horses orifice...

[url]www.irs.gov/prod/forms_pubs/pubs/p52901.htm [/url]

[i] Other Expenses
You can deduct certain other expenses as miscellaneous itemized deductions subject to the 2%-of- adjusted-gross-income limit. These are expenses you pay:

To produce or collect income that must be included in your gross income,
To manage, conserve, or maintain property held for producing such income, or
To determine, contest, pay, or claim a refund of any tax.
You can deduct expenses you pay for the purposes in (1) and (2) above only if they are reasonably and closely related to these purposes.
These other expenses include the following items.

Appraisal fees for a casualty loss or charitable contribution
Casualty and theft losses from property used in performing services as an employee
Clerical help and office rent in caring for investments
Depreciation on home computers used for investments
Excess deductions (including administrative expenses) allowed a beneficiary on termination of an estate or trust
Fees to collect interest and dividends
[b]Hobby expenses, but generally not more than hobby income [/b] [/i]


In english, I interpret this to mean -

IF you include your hobby income on your tax return, and....

IF your hobby expenses exceed 2% of your AGI,

THEN you can deduct your hobby expenses IN EXCESS OF 2% of your AGI, but only to the amount of the hobby income taxed on your return.

So, the rules have changed some, but the IRS has crafted the window narrow enuf that few would qualify.