TaxGuy
Member
Disclaimer - this is not meant to be accounting, tax or legal advice. Seek a qualified advisor before you make any decision regarding taxes and related items.
A homebrewer once asked me about deducting the cost of his equipment, supplies and ingredients on his tax return. His homebrewing activities generated a loss and would be used to offset some of his W-2 wage income earned from a full time job. Here were some of my thoughts during that conversation.
Generally speaking, you must engage in a trade or business before you can deduct any business expenses (IRC section 183). If your homebrewing does not constitute a trade or business or an activity engaged in for profit, deductions from related business expenses are generally limited to gross income from that business. In other words, if gross income from your brewing business is $1,000, your deductions are generally capped at $1,000.
In order to deduct expenses beyond the gross income generated by your homebrewing business, it must be an activity engaged in for profit. The courts look to a series of factors for purposes of determining whether or not an activity is engaged for profit. This is not intended to be an all-encompassing analysis of those factors, but they include items such as: 1) a history of profitability, 2) financial record keeping such as keeping a separate bank account for the activity, 3) the existence of a business plan and following through with that plan, 4) a review of profit and loss statements and changing future behavior based on that analysis, 5) successes in related ventures, 6) the existence of other means in which to finance the activity (i.e. other sources of income), and 7) the amount of personal enjoyment derived from that activity.
No single factor will establish whether or not an activity is a hobby vs. an activity engaged in for profit. A summation of all the factors (including those I didn't specifically list) will be taken into consideration when determining whether an activity is an activity engaged in for profit or a hobby.
Keep in mind that this does not mean that your brewing activities must be incorporated under State Law, or in the form of a Limited Liability Company, etc. in order to be an activity engaged in for profit. An activity engaged in for profit can be a sole proprietorship which is generally reported on Schedule C of Form 1040.
The challenge most homebrewers face is a lack of gross income. It is very hard to treat any activity that does not generate any income as an activity engaged in for profit. Most homebrewers do not have a brewing license and may not legally sell their beer. However, given the recent boom in homebrewing, it is possible that homebrewers could generate income from providing homebrewing educating, consulting and related personal services. This is a potential source of gross income, and depending on the facts and circumstances of this advising could constitute an activity engaged in for profit.
In summary, a homebrewer must consider many factors such as those listed above before concluding whether their homebrewing activities (i.e. consulting, educating, advising, etc.) rise to the threshold of a trade or business, or if it is simply a hobby. If it is anything less than an activity engaged in for profit, your deductions are generally limited to the gross income generated by that hobby.
EDITED TO ADD: I am only talking about a trade or business such as consulting, education and related services where permitted under local law. I am not suggesting that anyone illegally sell homebrew. That will get you into trouble.
To ensure compliance with requirements imposed by the IRS, I must inform you that any U.S. federal tax advice contained in or accompanying this document, unless otherwise specifically stated, is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code, or (ii) promoting, marketing, or recommending to another party any transaction or matter that is contained in or accompanying this document.
A homebrewer once asked me about deducting the cost of his equipment, supplies and ingredients on his tax return. His homebrewing activities generated a loss and would be used to offset some of his W-2 wage income earned from a full time job. Here were some of my thoughts during that conversation.
Generally speaking, you must engage in a trade or business before you can deduct any business expenses (IRC section 183). If your homebrewing does not constitute a trade or business or an activity engaged in for profit, deductions from related business expenses are generally limited to gross income from that business. In other words, if gross income from your brewing business is $1,000, your deductions are generally capped at $1,000.
In order to deduct expenses beyond the gross income generated by your homebrewing business, it must be an activity engaged in for profit. The courts look to a series of factors for purposes of determining whether or not an activity is engaged for profit. This is not intended to be an all-encompassing analysis of those factors, but they include items such as: 1) a history of profitability, 2) financial record keeping such as keeping a separate bank account for the activity, 3) the existence of a business plan and following through with that plan, 4) a review of profit and loss statements and changing future behavior based on that analysis, 5) successes in related ventures, 6) the existence of other means in which to finance the activity (i.e. other sources of income), and 7) the amount of personal enjoyment derived from that activity.
No single factor will establish whether or not an activity is a hobby vs. an activity engaged in for profit. A summation of all the factors (including those I didn't specifically list) will be taken into consideration when determining whether an activity is an activity engaged in for profit or a hobby.
Keep in mind that this does not mean that your brewing activities must be incorporated under State Law, or in the form of a Limited Liability Company, etc. in order to be an activity engaged in for profit. An activity engaged in for profit can be a sole proprietorship which is generally reported on Schedule C of Form 1040.
The challenge most homebrewers face is a lack of gross income. It is very hard to treat any activity that does not generate any income as an activity engaged in for profit. Most homebrewers do not have a brewing license and may not legally sell their beer. However, given the recent boom in homebrewing, it is possible that homebrewers could generate income from providing homebrewing educating, consulting and related personal services. This is a potential source of gross income, and depending on the facts and circumstances of this advising could constitute an activity engaged in for profit.
In summary, a homebrewer must consider many factors such as those listed above before concluding whether their homebrewing activities (i.e. consulting, educating, advising, etc.) rise to the threshold of a trade or business, or if it is simply a hobby. If it is anything less than an activity engaged in for profit, your deductions are generally limited to the gross income generated by that hobby.
EDITED TO ADD: I am only talking about a trade or business such as consulting, education and related services where permitted under local law. I am not suggesting that anyone illegally sell homebrew. That will get you into trouble.
To ensure compliance with requirements imposed by the IRS, I must inform you that any U.S. federal tax advice contained in or accompanying this document, unless otherwise specifically stated, is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code, or (ii) promoting, marketing, or recommending to another party any transaction or matter that is contained in or accompanying this document.
