Hobby-Loss Rules And Income

Hobby-loss rules

You can deduct hobby expenses up to the amount of your hobby income. Expenses that are more than the income you made from your hobby are nondeductible personal losses.

If you operate a business, your business losses can offset other income on your return. To be considered a business, an activity must have a profit motive.

Three-years-of-profit test

The IRS presumes you carry on an activity for profit if one of these applies:

  • It makes a profit in at least three of the last five years.
  • It makes a profit in at least two of the last seven years, and your activity is mainly one of these:
    • Breeding horses
    • Showing horses
    • Training horses
    • Racing horses

Hobby income vs. business income

The IRS considers many factors when deciding if your activity is a business or a hobby. No one item is the deciding factor, and the IRS might consider factors not listed. Deciding factors can include:

  • Manner you carry on the activity
  • Your and your advisor’s expertise
  • Time and effort you put into carrying out the activity
  • Your expectation that assets used in the activity might appreciate in value
  • Your success in carrying on similar or dissimilar activities
  • Your history of income or losses with respect to the activity
  • Account of occasional profits, if any, that are earned
  • Your financial status
  • Elements of personal pleasure or recreation the activity has for you

Deduct hobby expenses as itemized deductions on Schedule A. They’re part of your miscellaneous itemized deductions. You can only deduct your total miscellaneous itemized deductions if they’re more than 2% of your adjusted gross income (AGI).

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