You say you have a business, but does the IRS? The answer will determine whether you can deduct expenses from income.
Why is this even an issue? Well, with a business, you can deduct expenses from income. You can even have negative business income, which can offset other taxable income, such as from a spouse's job or other income, and this is called a net loss.
But if what you have is a hobby, you’re not allowed to deduct hobby expenses. And you still have to report the hobby income.
It can be tempting to try to pass a hobby off as a business, so the IRS looks carefully at whether you have a true business or only a hobby.
The IRS has a list of factors for determining whether your pastime is more business than hobby. No one factor is decisive. The IRS says all facts and circumstances are taken into account. Here are the most common factors:
The IRS assumes that an activity is for-profit if it makes a profit in at least three of the last five tax years, including the current year. (If you're breeding, showing, training or racing horses, that range is two of the last seven years.)
Report business income and expenses on Schedule C, Profit and Loss from Business.