Hobby Loss

Hobby Loss

Hobby Loss means:
a loss incurred by a taxpayer in an activity not pursued for profit. In general, hobby losses are deductible only to the extent of income generated by the hobby. If an activity generates a loss in 3 of 5 years, there is a rebuttable presumption that it is not operated for profit. Former IRC (check if this IRC provision is current here) § 183.

Do the taxpayer have a hobby or a business? The law presumes you're in business for profit if the taxpayer report a taxable profit for 3 years out of any 5-year period. Otherwise, his or her activity is assumed to be a hobby and the taxpayer do not have a tax-deductible loss.

Description and Definition of Hobby Loss

Loss from a hobby or other activity you did not pursue for a profit. Hobby expenses are deductible only up to the amount of income from the hobby. Loss deductions in excess of income are not allowed. The law presumes you're in business for profit if you report a taxable profit for three years out of any five-year period. Otherwise, your activity is assumed to be a hobby unless you can prove otherwise. If you fail to show a profit for three out of five years the IRS may presume your business is a hobby and disallow losses from it.

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