Deductions permitted by the
hobby loss rule are determined and allowed according to the following sequence: (1) amounts allowable under other IRC provisions without regard to whether the activity is profit-motivated (but other IRC provisions limiting the amount of these deductions would apply, such as limitations imposed on deductions for interest payments under IRC Sec.
Because the activities for which deductions are claimed are often personal recreational pastimes, this is referred to as the
hobby loss rule.
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.
If a hobbyist engages in some sales transactions and reports this as a dealer, he might be subject to the
hobby loss rules, which could vitiate the losses.
183-2(b)(l) used to determine intent to make a profit under the
hobby loss rules to decide whether a taxpayer is a professional gambler:
If the activity is not engaged in for profit, it is subject to the
hobby loss rules in Sec.
165(d) is analogous to the
hobby loss rules of [section] 183:
Conversely, the
hobby loss rules act to prevent the expensing of what otherwise would be personal expenses disguised as "valid" business expenses, thereby causing significant losses of revenue to the Treasury.
Proper grouping may help a taxpayer avoid the application of the
hobby loss rules.
If you choose self-employment over a second job to earn additional income, avoid the
hobby loss rules if you incur a loss.
Aggregating activities to avoid the
hobby loss rules.
unearned income,
hobby loss rules, preferential rates for capital gains, and the antiquated and punitive $3,000a-year capital loss limitation.
