Business versus Hobby Rules for Expense Deductions, from Brookwood Tax Service - Federal and state income tax preparation & tax planning services

This page last updated on
July 15, 2003

Business or Hobby?
Be aware of the rules

Expenses connected with your business activities may be tax deductible or limited to the rules for hobby expenses. The limit on hobby losses applies to individuals, partnerships, estates, trusts, and S corporations. It does not apply to corporations other than S corporations. In determining whether you are carrying on an activity for profit, all the facts should be taken into account. No one factor alone is decisive. Among the factors to consider are whether:

	You carry on the activity in a business-like manner.
	The time and effort you put into the activity indicates your intention to make it profitable.
	You depend on income from the activity for your livelihood.
	Your losses are due to circumstances beyond your control (or are normal in the start-up phase of your type of business).
	You change your methods of operation in an attempt to improve profitability.
	You, or your advisors, have the knowledge needed to carry on the activity as a successful business.
	You were successful in making a profit in similar activities in the past.
	The activity makes a profit in some years (and the amount of profit it makes).
	You can expect to make a future profit from the appreciation of the assets used in the activity.

If the IRS determines your business activity to be a hobby that is not operated with a profit motive, deductions will be limited to the amount of gross income generated by the activity and those deductions must be taken as miscellaneous itemized deductions on Schedule A (subject to the "floor" of 2 percent of adjusted gross income).

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Business or Hobby? Be aware of the rules

Business or Hobby?
Be aware of the rules