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.
Farlex Financial Dictionary. © 2012 Farlex, Inc. All Rights Reserved

Hobby Loss

A nondeductible loss arising from a personal hobby as contrasted with a loss arising from an activity engaged in for profit.
Copyright © 2008 H&R Block. All Rights Reserved. Reproduced with permission from H&R Block Glossary
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[section]1.183-2 relating to hobby losses. The case study was developed so that the facts and circumstances would have to be carefully examined in order to determine whether the golfing activity should be considered a trade/business or a hobby.
In its guidance related to hobby losses, the IRS specifically lists the following activities or roles that are considered possible hobbies: auto racing, craft sales, bowling, stamp collecting, dog breeding, yacht charter, art, horse breeding, farming, gambling, fishing, horse racing, photography, writing, working as an entertainer, airplane charter, rentals, motocross racing, and direct sales.
After first discussing the basics of deductions, it covers the following topics: hobby losses, start-up expenses, inventory, home office deductions, travel and entertainment expenses, retirement deductions, and how to stay out of trouble with the ILLS.
Well known to tax professionals, these red flags include having large deductions relative to income, reporting hobby losses as a trade or business activity, and using a tax preparer that has been targeted by the IRS for claiming false deductions.
Easter, TC Memo 1992-188 Taxpayer should know that hobby losses are not deductible in activity without profit motive.
Hobby loss: In Ballard,(40) the Tax Court held that an investment banker generated only hobby losses from his S corporation's yacht-chartering activity.
However, few taxpayers have elected the "alternative" presumption, since the election alerts the IRS that the return includes possible hobby losses, as well as extends the statute of limitations.
183 disallows certain deductions associated with activities not engaged in for profit (so-called "hobby losses").