What is Hobby Loss Rule ?
The term “Hobby Loss” is expenditure to pursue a recreational activity which is not recouped as the law allows deduction of expense only to the extent of income earned by the hobby or recreational activity. Internal Revenue Code (IRC) §183 provides the law to curb perceived loss deduction abuses by hobbyists. The hobby loss rules apply to individuals, S corporations, trusts, estates, and partnerships, but not to C corporations.
When can you deduct hobby loss ?
The only way you can deduct the expense if the activity is for profit. The Hobby loss rules under section 183 of the IRC says that you can deduct the hobby loss on an activity only if you can prove that the activity was with a profit motive you can prove, then the hobby loss rule applies. Under the Tax Cuts and Jobs Act, you have to report all of your income , but can’t deduct any of your expenses. This is because of the suspension of the miscellaneous itemized deduction subject to the 2%-of-adjusted-gross-income threshold. The hobby loss rule applies to individuals, and not to C corporations.
In a recent case, Potter, TC Memo 2018-153 a person in business did cowboy mounted shooting on the side. He entered contests and had incurred costs . He got overall loss on the cowboy activity. However , IRS did not agree . As per IRS , his claim of deductions is not correct because the activity was a hobby.
However , the Tax Court allowed the claim of hobby loss on another ground that he conducted the cowboy mounted shooting through a C corporation, and thus the corporation could claim the deductions . The Tax Code’s hobby loss rule does not apply to C corporations.