Let me explain why this is important from a tax reporting perspective.
A business can deduct all its legitimate operating expenses from the business’ sales and income – either on a Schedule C, or a business entity return (partnership, corporaton, etc.) and deduct losses, as appropriate.
However, with a hobby, you must report all your income (on Schedule 1) – but you may not deduct your opertating expenses at all. Nowhere. Not on any form. The only thing you may deduct are your cost of goods sold. In other words, hobbyists that lose money don’t get to deduct expenses OR losses.
