When I tell gamers I do taxes, inevitably someone chimes in with a comment that goes something like this: “Heh, I sure wish I could deduct all the RPG books I buy every year.” For most people, unfortunately, the response is “Sorry.” However, there are situations in which a gamer could legitimately deduct gaming supplies on their taxes. At this time of year, we’re all thinking about our taxes (or at least have thought about them in the past week), so I thought I would take a little bit of time to address those situations. The question I’m aiming to answer is, broadly:
“How much of the money I spend yearly on gaming supplies (and other “gaming related” expenses) is tax deductible?”
It’s a great question, and it gets the standard initial answer to any tax question, ever: It depends.
First, qualifications: I am what you would call a “tax professional.” I do taxes for a living. I also have some letters after my name to prove it.
Now, the disclaimer: The information on this website should not be used in any actual transaction without the advice and guidance of a professional Tax Adviser who is familiar with all the relevant facts.
Although the information contained here is presented in good faith and believed to be correct, it is General in nature and is not intended as tax advice. Furthermore, the information contained herein may not be applicable to or suitable for the individuals’ specific circumstances or needs and may require consideration of other matters.
Roving Band of Misfits assumes no obligation to inform any person of any changes in the tax law or other factors that could affect the information contained herein.
In other words, it is impossible to give comprehensive tax advice over the internet, no matter how well researched or written. Before relying on any information given on this site, contact a tax professional to discuss your particular situation.
Phew. Now let’s get to the good stuff.
First, let’s hash some things out. Your “relationship” to your gaming expenses determines how deductible they are, if at all. With that in mind, I’m going to divide the answers up into three different categories: Gaming is My Hobby, Gaming is My Business, and Gaming is My Employer’s Business.
Gaming is My Hobby
If you game as a hobby, then you can deduct hobby losses up to your hobby income. So, for example, let’s say you get paid $100 at a convention for judging; you need to claim that income. However, you also had to buy some minis for the adventures you were running ($50), and were required to print out the adventure ($10), and had to buy some dice to run the game ($25). You also had to buy a monster manual because you wanted to be able to reskin things on the fly, if necessary ($35). Of the $120 in expenses, you can only deduct up to the income amount – $100.
Where do I report it? The income you report as hobby income on line 21 of the 1040 – other income. The expenses you report as hobby loss in the “Miscellaneous Deductions” section of the Schedule A. And that’s where the hobby loss deduction really starts to suck. Here’s why: no matter what, you have to claim that $100. However, you might not get to claim the $100 deduction, even though you paid the expenses.
Why not? Glad you asked. Let me explain how miscellaneous deductions work. They fall into the “2%” deductions category on Schedule A (itemized deductions), which means that there is a 2% of Adjusted Gross Income (AGI – 1040 line 37) “floor” on Miscellaneous deductions. As an example, Sue Gamer has a $40,000 AGI; this means she has an $800 floor (2% of $40,000). Sue’s deductible items need to get “above” the “floor” to be deductible. This means if Sue Gamer has $801 in “2% deductions,” Sue will be able to deduct $1 (the amount above the “floor”). AND that’s assuming she is using Schedule A at all. For many people, the standard deduction is a better tax choice, and for them, nothing that would go on Schedule A really matters.
Gaming is My Business
For people operating as a business, the tax code is more generous. All legitimate business expenses are deductible, even if it drives you into a loss. There is also no 2% floor, and the expenses are applied directly against the income of the business whether you file Schedule A (itemized deductions) or not. Please note that I said “business” expenses, which means you need a legitimate business reason for the expense. In other words, you need to point to the expense and explain why it’s related to your business activities. With Schedule C, you can also get into business use of home territory (deducting things like utilities), and that’s a topic I will not be tackling here.
Where do I report it? If gaming is your business, then you need to report both your income and your losses on Schedule C. Bear in mind that, if your business generates a profit above a certain amount (generally, $400) the profits for your business are subject to the self employment tax (which I will also not be covering here), roughly 12% of the profit amount above and beyond the normal taxes on that money. (The self employment tax is meant to capture social security and medicare taxes that, if you were an employee, would be withheld from your paychecks.) You figure the self employment tax on Schedule SE.
So the question becomes, do I have a hobby or a business? There is a clear advantage to having a gaming business: you can claim a loss if your expenses are greater than your income, and you get to claim all your expenses whether or not you file Schedule A. But how do you know if your activities qualify as a business?
In cases where the IRS questions whether a taxpayer has a hobby or a business, the burden of proof is on the taxpayer. Here are the business activity “tests,” as grabbed from Tax Girl. She does a great job of not only listing the tests, but restating them in plain English.
The most important test is the profit motive. The IRS considers that you are engaging in a business when it is your intention to make money. You should be able to demonstrate that you have made a profit for at least three of the last five tax years.
Of course, it isn’t a given that all legitimate businesses will make a profit. So the IRS gives you another bite at the apple. They consider a number of factors, including:
- Whether you run your business as a business. Sounds simple, right? This includes keeping good records and promoting your business. [Edit: Having a separate bank account for your business activity is another big one]
- How much time and effort you expend in the activity. It should go without saying that only spending minimal time and effort on your business sends a message that you’re not so serious about it.
- Your level of expertise. How much do you know about your business?
- Your track record. What kind of success or failure have you had in other similar endeavors?
- Your financial picture. A bona fide business is generally something that a taxpayer relies upon to make a living.
- Whether you continue to change your business practices in order to make money. When things aren’t going so well in business, business owners switch gears. As your financial picture changes, your business practices should, too.
- The nature of your losses. All start up businesses expect a few bumps at the beginning. However, continuous losses that may be within your control to change would not be acceptable in a bona fide business. [Edit: For example, following a loss year, can you document what did you did differently to try and turn a profit?]
- Whether you expect the value of your business to grow. This includes accumulating appreciating assets.
- How much fun you’re having. Oh yeah, the IRS looks at whether you enjoy yourself. There’s nothing wrong with liking what you do – but if you like it to the exclusion of working at it, you’re going to raise some eyebrows.
Meeting either the “Profit in 3 of the last 5 years” rule, or meeting enough of the 9 factors above, would define your gaming activities as a business, not a hobby. Bear in mind that you don’t have to meet all 9 tests, but you should be able to meet a lot of them.
Gaming is My Employer’s Business
So this last one is a bit of an odd duck, and probably doesn’t apply to most readers. However, if you work in the gaming industry, then purchases of things like games and dice can be deductible. Here is what the IRS says about Unreimbursed Employee Expenses:
You can deduct only unreimbursed employee expenses that are:
- Paid or incurred during your tax year,
- For carrying on your trade or business of being an employee, AND
- Ordinary and necessary.
An expense is ordinary if it is common and accepted in your trade, business, or profession. An expense is necessary if it is appropriate and helpful to your business. An expense does not have to be required to be considered necessary. (Pub 529, Emphasis mine)
If buying games and dice keeps you competitive as an employee, helps you do your job better, or keeps you abreast of your industry, then the cost of those games and dice is probably deductible.
There are two caveats that I should mention.
- If your employer reimbursed you for the expense, it’s not deductible.
- You are always better off letting your employer provide things than paying for them yourself. “But I get a tax deduction if I pay for it!” you say. Yes, but when your employer pays for it, it’s free to you, and free trumps the small benefit of a tax deduction every time.
Where does it go? Unreimbursed Employee Expenses go on Schedule A, line 21. They are subject to the same 2% floor as hobby losses, and pose the same problems for those taxpayers who take the standard deduction.
For most people, deducting expenses related to their hobby isn’t usually viable. However, if you feel that you fall into one of the categories above, you should certainly see a tax professional at least once in order to get a handle on what sorts of things you can deduct, and what you can’t. Chances are, you’re missing some tax deductions that you haven’t thought of.
One final note: If you have expenses that you didn’t deduct in prior years, you can go 3 years back and “change” (amend) your tax returns for those years. While the prospect of re-doing your taxes is probably not appealing, leaving money on the table should be even less appealing. Besides, form 1040X is pretty easy to fill out.
I’ve debated whether or not I should leave comments open on this particular post. I have decided I will; however, I will not be answering any “what about this specific situation I have” questions. I will amend the article to answer more general questions about things I may have missed or was not clear enough on. I will also delete any answers that people try to give to questions within the comments. In other words, the comments on this article will be closely curated, and may eventually be shut off.