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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For a detailed analysis of court cases related to hobby losses, see Richard H.
Hobby losses are not deductible; deductions offset no more than revenues.
Easter, TC Memo 1992-188 Taxpayer should know that hobby losses are not deductible in activity without profit motive.
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.
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.