Given our proximity to April 15, it is only appropriate to have a tax related blog. So... suppose you are interested in giving music lessons, and you give a number of piano lessons. Certainly, some amount of tax is owed to the government, but how does it work?
Business or hobby. Regardless of profitability, the IRS distinguishes between businesses and hobbies. If your activities are classified as being a hobby, all your expenses may not be deductible. A hobby is an activity that is not engaged for profit. However, you can still lose money and be classified as a business, albeit a lousy one. But in order to show that you are a business, you must carry on your activity in a "business-like" manner, i.e., separate checking accounts, good records, etc. For a few lessons, is the distinction critical? Assume for the moment, that our activity is a business using the market rate claim.
Expensability. The IRS has a document on deducting business expenses. Here hobbies are defined as a "not-for-profit activity". In this case, the limitation on expense deduction is the gross income from the actities (see the example on page 5 regarding Ida). This is reasonable. Imagine that you like to build R/C helicopters, and you sell these to your friends at cost. The IRS would expect to receive something from the transaction, however, since you sell it at cost, you really aren't making anything, so you shouldn't have to pay any taxes. If you sell it to your friends at less then cost, you shouldn't be able to go back and try to reduce the tax liability for the rest of your earnings by claiming the deduction. (However, if you are self-employed, and R/C helicopters is your living, you should be always trying to make a profit, in which case, if you do have a loss, you reduce your total earnings since this is part of what you are trying to do for survival.)
So, what about our piano lessons. As long as the market rate is charged, it seems like it should be counted as a business. If the rate is heavily discounted, that may be more questionable. The problem with lessons is that the cost of material is not so easily computed. What goes into piano lessons: