Business vs. Hobby Losses

An individual who conducts an activity as a for-profit business is allowed to deduct expenses that are ordinary and necessary in carrying on the trade or business.  If expenses exceed income, the loss is deductible against other income.  However, if a loss is attributable to an activity not engaged in for profit (a hobby), the loss is not allowed as a deduction against other income.

Facts & Circumstances Test

1)The manner in which taxpayer carries on the activity.

2)The expertise of taxpayer or advisors

3)Time & effort spent by taxpayer in carrying on the activity

4)The expectation that assets used may appreciate in value

5)Taxpayer’s success in other similar or dissimilar activities

6)Taxpayer’s history of income/loss with respect to the activity

7)Amount of occasional profits, if any

8)Financial status of taxpayer

9)Elements of personal pleasure or recreation