how hobby loss works
expenses are an expected part of running a business you have to spend money to make money expenses that are necessary to carry on a trade or business incurred to produce income or paid for investments in your company are deductible when despite a profit motive your overall expenses exceed your earnings the loss can offset unrelated income 2 any income you earn is taxable and must be claimed even if it doesn t come from your employer this includes any part time and temporary work side gigs and recreational pursuits that lead you to make a profit 1 expenses related to these activities that result in a loss are generally deductible that is of course unless the irs considers your activity to be a hobby 3 the hobby loss rule of the internal revenue code irc attempts to curb perceived loss deduction abuses by hobbyists the hobby loss rule applies to individuals s corporations trusts estates and partnerships but not to c corporations deductions are therefore limited for activities not engaged in for profit 4 according to the irs it applies the hobby loss rule to disallow losses of activities it finds likely not to be engaged in for profit profit must be demonstrated for three out of five consecutive tax years some activities such as horse racing have slightly different requirements taxpayers engaged in these activities must establish a profit motive to avoid the hobby loss limitations 5 proof of profit motives include receipts and detailed recordkeeping which is a good idea for every taxpayer in any situation 6 the tax cuts and jobs act eliminated itemized miscellaneous deductions including hobby losses until after the 2025 tax year special considerationsthe irs published a tip sheet to help taxpayers distinguish between hobbies and legitimate business operations 1 prior to the 2018 tax year you were allowed to claim itemized deductions as itemized on schedule a of form 1040 assuming you were engaged in a hobby and not a covert or nascent business the deductions were required to be taken as follows and only to the extent state in the following categories in 2017 president donald trump signed the tax cuts and jobs act into law the 200 page law went into effect on jan 1 2018 and made sweeping changes to the tax law including changes in the tax bracket mortgage interest deductions medical expenses miscellaneous expenses and itemized deductions so how does this affect hobbyists once the tcja was signed any expenses or hobby losses that a taxpayer was able to claim to reduce their hobby income in previous tax years are no longer allowed this applies to tax returns filed between the 2018 and 2025 tax years 6 avoiding a hobby lossalthough the tcja eliminated miscellaneous itemized deductions it s still important to know how to avoid the hobby loss rule if provisions aren t made after the 2025 tax year the easiest way to avoid the hobby loss rules is to frequently turn a profit the hobby loss rule presumes that an activity is for profit if the operation is profitable for three out of the previous five years ending with the current taxable year for actions involving horses the timeframe is two of the previous seven years 3 if the presumption is not met then the taxpayer must establish a profit motive the following nine factors define hobby income and losses a taxpayer that fails to turn a profit or to establish a profit motive is not engaged in a business the hobby loss rules will apply hobby expenses that fail its three tier deduction system are not deductible 7 hobby expenses that exceed hobby income are disallowed as non deductible hobby losses 1 