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<<My husband and daughter ride horses and enter 'team penning' competitions. It's quite expensive however there is prize money that is won. I've just received 1099 forms for both of them. Can I deduct expenses since I'm paying taxes on the earnings?>>

You're required to report the income on the face of the tax return as miscellaneous income (not subject to self employment tax). The expenses (as allowed...up to the amount of the income...but no more) are then deducted on Schedule A as a Miscellaneous itemized deduction.

Without knowing more about the issues, I can't tell you if it's a hobby (also called a "not for profit" activity) or not, but I'd be pretty sure that the IRS would consider this a "not for profit" activity...subject to those rules.

The IRS consider a business "an activity in which you engage with a for-profit-motive". Of course that's not defined. A hobby is an activity which is not a business . . .

Generally, if you make money 3 out of 5 years, you can consider it a business. So if your husband and daughter consistently make money, then you will want to rearrange your affair so the "team penning" will qualify as a business and not as a hobby. No, you don't have to incorporate yourself to be in business. All you have to do is declare yourself in business (by making a mental note of it) to be "in business". Of course, the burden of proof on whether this activity is run with a "for-profit" motive is on you. So you need to keep excellent record. You would also want to separate out all activity not "customary or necessary" for the team penning (read, normal or usual).

There's lot of benefit when your activity is a business vs. a hobby. One is all the expense is from your business, so would be an "above-line" deduction--e.g. reduce your AGI. The other is in those year which you lose money, you can still fully deduct all expenses. If it were a hobby, you get to deduct nothing--because you can only deduct expense up to your hobby earning (and your hobby earning is less than zero, so you get to deduct nothing). Also, as a business, you can set up a retirement plan.

Personally, I bowl and enter bowling tournament. I'm good enough that I win consistently. I treat this activity as a business and keep very good record. I haven't been audited by the IRS yet, but I feel confident I can prove this activity is a "for-profit". Heck, I make more money than those card-carrying members of the "Professional Bowler Association".
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