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Abstract: 

When reported on tax returns, business activities that resemble a hobby or recreational activity often receive close scrutiny by the IRS. Normally, a taxpayer engaged in a “for profit” activity is entitled to deductions against income for a variety of expenses. However, the deductibility of hobby-related expenses is much more limited. This article discusses the potential tax consequences of the alternative classification of a “for-profit business activity” versus a “hobby activity.” Additionally it analyzes the regulations under Section 183 that provide a non-exclusive nine-factor list of considerations. The IRS and the courts look to these factors in determining whether an activity is engaged in “for profit.” The article then examines recent Tax Court cases in which the court employed the nine-factor analysis. Finally, the authors present conclusions and practical steps drawn from these cases to assist taxpayers in avoiding the costly pitfalls of Section 183.

Keywords: hobby losses, Internal Revenue Code Sec. 183, Treasury Regulations Sec. 1.183, nine-factor analysis, tax losses

Affiliations:  1: Stockton University; 2: Stockton University; 3: Stockton University.