If the IRS determines you have a hobby loss, they can disallow the losses on your return.
In this case you would not only owe more taxes, but you would also owe penalties and interest. In addition, if you have taken these losses for more than one year, the IRS can review more than just one year and assess more taxes, penalties, and interest for each year that you took the loss.
In determining if a loss is from an activity engaged in for profit or for hobby the IRS looks at the following items:
- The manner in which the taxpayer carries on the activity
- The expertise of the taxpayer and their advisors
- The time and effort expended by the taxpayer in carrying on the activity
- The expectation that assets used in the activity may appreciate in value
- The taxpayer’s success in carrying on other similar or dissimilar activities
- The taxpayer’s history of income or losses with the activity
- The amount of occasional profits, if any
- The taxpayer’s financial status
- Elements of personal pleasure or recreation from the activity
These are items each taxpayer with a farm or business should take into consideration before you take losses on the return. For more information see https://www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/IRC-183-Activities-Not-Engaged-in-For-Profit-ATG.
The Wassman CPA Services website and blog is meant to offer general information to our readers. The information provided is not intended to replace or serve as a substitute for any accounting, tax or other professional advice, consultation or service. You should contact Wassman CPA Services for advice concerning specific matters prior to making any decisions.
Photo by Colleen Taugher. This work is licensed under a Creative Commons Attribution 2.0 Generic License.
