Tax Tip of the Week
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For the week of
March 20, 2000
Hobby losses can become business losses
The IRS has specific requirements for taking business losses.
One of those requirements is determining what is a business and what is a hobby.
Losses that come from an activity "not engaged in for profit" are usually deductible, but only to the
extent of the income produced by that activity. In short, your hobby losses can only offset your hobby income.
An activity that has a profit in any three of five consecutive tax years (ending with the tax year in question)
is not considered to be a hobby unless the IRS can prove otherwise. If you breed, train, show, or race horses,
you get a better break. You must have a profit in any two out of seven consecutive years to not be considered a
hobby.
Many legitimate businesses started out as hobbies.
At what point your activity changes from hobby to business can be difficult to determine. Please give us a call.
We will be glad to assist you with all your tax and business planning.
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