Hobby Loss


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Hobby Loss

A loss a taxpayer may not deduct from his/her taxable income because it occurred in the pursuit of personal pleasure. Suppose one sells lemonade for fun on Saturdays and takes a loss in doing so. This will likely be considered a hobby loss because one is not likely to be actively pursuing profit. The IRS applies what is called the "hobby loss rule" to determine whether it considers a loss to be hobby or business related; this rule states that an activity profitable three years out of every five can be considered a business. So the lemonade stand, which may never be profitable, will probably be considered a hobby loss.

Hobby Loss

A nondeductible loss arising from a personal hobby as contrasted with a loss arising from an activity engaged in for profit.
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165(d) is analogous to the hobby loss rules of [section] 183:
The hobby loss restriction has been a valued part of the IRS armada for many years, restricting attempts by taxpayers to claim expenses (and thus deductions from income) beyond rather meager income derived from the taxpayers' "pet" projects.
TABLE 3 NOVICE SUBJECTS CHANGES MADE TO RETURN IN RESPONSE TO AUDIT FLAGS Audit Flag/Responses No Audit Flags Audit Flags (a) Schedule C (Golfing Activity) Read hobby loss audit flag NA 36 Treated Schedule C as hobby 0 6 Percent treated as hobby 0 16.
As expected, these reasons coincide with those found in the regulations of the hobby loss sections provided to the participants at the outset of the study.
Because the activities for which deductions are claimed are often personal recreational pastimes, this is referred to as the hobby loss rule.
In another horse-activity hobby loss case, Dennis, (28) a husband and wife used QuickBooks to keep the books and records for three distinct activities: (1) horse breeding, (2) hay baling, and (3) cosmetology.
Aggregating activities to avoid the hobby loss rules.
The court held that they were an integrated activity, given their organizational and economic interrelationships, and that the horse activity was therefore not a hobby loss.
Comm'r (TCM 2012-115), provides an excellent window into the courts' interpretation of the hobby loss rule and the nine factors used to determine whether an activity is conducted for profit or business.
The Tax Court disallowed an IRS auditor's deductions for breeding greyhounds as a hobby loss.
Proper grouping may help a taxpayer avoid the application of the hobby loss rules.
For hobbies, expenses are deductible if they do not create a hobby loss, if they exceed 2% of AGI (which is larger with gambling winnings included), and if they meet the requirements in Treasury Regulations section 1.