Hobby Losses (Portfolio 548)
The Portfolio, Hobby Losses, describes the operation of §183, which is intended to prevent taxpayers from converting nondeductible personal expenses into deductible business expenses.
Tax Portfolio, Hobby Losses, No. 548 describes the operation of §183, which is intended to prevent taxpayers from converting nondeductible personal expenses into deductible business expenses.
This Portfolio explores the §183 “hobby loss” rule, under which a taxpayer’s deduction for expenses incurred in an activity not engaged in for profit is limited to the income generated by the activity. The regulations under §183 contain a list of factors for determining profit intent. These factors, which are based on prior case law, are intended to provide an objective means of determining the taxpayer’s subjective intent.
Section 183 imposes a “tier system” for deducting expenses in cases in which the potential deductions exceed the allowable deductions. First tier deductions are items, such as real estate taxes, that are deductible without regard to business use or profit motive. Second tier deductions are out-of-pocket expenses attributable to the activity or home business use. Third tier deductions are items, such as depreciation, which affect the basis of property.
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II. Section 183 Disallowance of Hobby Losses