Deductions & credits

In order to make this determination, taxpayers should consider the following factors:

• Does the time and effort put into the activity indicate an intention to make a profit?
• Does the taxpayer depend on income from the activity?
• If there are losses, are they due to circumstances beyond the taxpayer’s control or did they occur in the start-up phase of the business?
• Has the taxpayer changed methods of operation to improve profitability?
• Does the taxpayer or his/her advisors have the knowledge needed to carry on the activity as a successful business?
• Has the taxpayer made a profit in similar activities in the past?
• Does the activity make a profit in some years?
• Can the taxpayer expect to make a profit in the future from the appreciation of assets used in the activity?

The IRS presumes that an activity is carried on for profit if it makes a profit during at least three of the last five tax years, including the current year — at least two of the last seven years for activities that consist primarily of breeding, showing, training or racing horses.

Basically, hobby income is casual:  you are doing an activity you enjoy, and you make some money from it.  It is not incorrect to claim expenses from hobby income, but your deduction is subject to 2% of your AGI, can only be as much as your hobby income, and you only get benefit if you are itemizing your deductions.  Hobby income is taxable, but is not subject to self-employment taxes, nor is it considered earned income.

However, if you are playing golf for profit purposes, this is a business.  You could deduct your expenses, and even have a reportable loss.  On the other hand, gain you have will be subject to self-employment taxes.  

Again, the IRS will classify your "business" as a hobby if your expenses over several years are greater than your income, because it's clear you are not receiving income with a profit-making purpose in mind.