Tax News

CCH (cch.taxgroup.com) reports:

  The IRS has released a fact sheet to help taxpayers determine whether an activity is engaged in for profit or merely as a hobby. The fact sheet discusses the hobby loss rules and lists several non-inclusive factors to be considered when making this determination, including:

  --Does the time and effort put into the activity indicate an intention to make a profit?

  --Do you depend on income from the activity?

  --If there are losses, are they due to circumstances beyond your control or did they occur in the start-up phase of the business?

  --Have you changed methods of operation to improve profitability?

  --Do you have the knowledge needed to carry on the activity as a successful business?

  --Have you made a profit in similar activities in the past?

  --Does the activity make a profit in some years?

  --Do you expect to make a profit in the future from the appreciation of assets used in the activity?

  If an activity is not for profit, losses from that activity may not be used to offset other income and deductions cannot exceed the gross receipts from the not for profit activity. Further, hobby deductions are claimed as itemized deductions in the following order and only to the extent stated in each of three categories:

  --Deductions that a taxpayer may claim for certain personal expenses, such as home mortgage interest and taxes, may be taken in full.

  --Deductions that do not result in an adjustment to the basis of property, such as advertising, insurance premiums and wages, may be taken next, to the extent gross income for the activity is more than the deductions from the first category.

  --Deductions that reduce the basis of property, such as depreciation and amortization, are taken last, but only to the extent gross income for the activity is more than the deductions taken in the first two categories.

IRS Fact Sheet FS-2008-23, 2008FED ¶46,549

Other References:

 
Code Sec. 183

  CCH Reference - 2008FED ¶12,177.169

  Tax Research Consultant

  CCH Reference - TRC BUSEXP: 3,052

  CCH Reference - TRC BUSEXP: 15,250