Business v. Hobby – IRS is on the hunt for taxpayers who year after year report large losses from hobby-sounding activities on Schedule C or F of the 1040 to help offset wages, business or investment earnings, or other income. Revenue you collect from a hobby is taxable, reported as other income on Schedule 1 of the 1040. But you cannot deduct the related expenses. Before 2018, itemizers could deduct hobby expenses, up to the amount of their reported hobby income, as a miscellaneous deduction on Schedule A, and only to the extent that the total of all miscellaneous itemizations exceeded 2% of adjusted gross income. The 2017 tax law temporarily nixed through 2025 most miscellaneous itemizations, and last year’s “One Big Beautiful Bill” permanently ended this tax write-off.
To deduct a Schedule C loss, you must show the activity is a business. It needs to be conducted with continuity and regularity in a businesslike manner, and you must have a reasonable, good-faith objective in making a profit from it. IRS regulations provide a safe harbor. If your activity generates a profit in three out of five consecutive years, or two out of seven years for horse breeding, the law presumes you’re in business to make a profit unless IRS establishes otherwise.
The hobby-business analysis is trickier if you can’t meet the safe harbor. That’s because the determination of whether an activity is properly categorized as a hobby or a business is then based on each taxpayer’s facts and circumstances. IRS and the courts look at nine factors:
- Expertise of the taxpayer and advisers.
- Manner in which one carries on the activity.
- Time and effort devoted to the venture.
- Expectation that assets from the activity may appreciate.
- History of income and losses (the more years of large consecutive losses, the harder it is to show a profit motive, unless the activity is still in its start-up stage).
- The amount of occasional profits.
- Success in conducting other activities.
- Elements of personal pleasure or recreation.
- Whether the taxpayer has substantial income from other sources, such as wages.
Gambling Income and Losses – Take note of these two gambling-related tax changes that kicked in this year. The first involves deducting gambling losses. Beginning with 2026 returns filed next year, only 90% of gambling losses can be claimed by itemizers on Schedule A of the 1040, and only to the extent of winnings reported by the taxpayer on Schedule 1.
Second, casinos have a higher W-2G threshold for reporting winnings. Starting with 2026 forms sent out in 2027, casinos must file Form W-2G with IRS for each person who wins $2,000 or more in bingo, keno or playing the slots. This $2,000 figure will be adjusted annually for inflation. The prior thresholds for reporting gambling winnings were $1,200 for bingo and slots and $1,500 for keno.
Business Mileage to Increase Effective 7/1/26 – IRS drives up the standard mileage allowance for business vehicle usage. The rate will be 76¢/mile for the final six months of 2026, a 3.5¢ hike. The Service raised the rate due to the steep gas prices at the pump this year. The mileage rate for medical travel and military moves increases by 3¢ to 23.5¢ a mile. The 14¢-a-mile charitable driving rate is set by law and doesn’t change.
Charitable Expenses – Here’s a reminder of two tax changes that kicked in this year: Nonitemizers can deduct up to $1,000 of charitable cash contributions…$2,000 for joint filers…beginning with their 2026 tax returns filed in 2027. Meanwhile, itemizers get a slight haircut on charitable donation write-offs.
Individuals can deduct charitable contributions on Schedule A only to the extent that their total donations exceed 0.5% of adjusted gross income shown on Form 1040. This is akin to the long-standing rule for deducting medical expenses on Schedule A, in which total medicals are deductible only to the extent they exceed 7.5% of AGI.