Checklist of Profit Motive Factors for Hobby Loss Rules

The hobby loss rules under IRC Sec 183 can be an issue in a few industries that seem to draw more attention than others…

Examples of possible Code Sec. 183 activities include, but are not limited to:

  • fishing,
  • horse racing,
  • horse breeding,
  • farming,
  • motor-cross racing,
  • auto racing,
  • craft sales,
  • bowling,
  • stamp collecting,
  • dog breeding,
  • yacht charter,
  • artists and entertainers,
  • gambling,
  • direct sales,
  • photography,
  • writing,
  • airplane charter, and
  • rentals

So then how does one overcome this presumption of “hobby” vs that of trade or business activity… the following checklist may be able to help with this issue?

  • The manner in which the taxpayer conducts the activity. Is there a legitimate intent to make a profit? Are accurate books and records maintained?
  • The expertise of the taxpayer. Does the taxpayer have any prior experience, do they seek the advice of others?
  • The time and effort expended by the taxpayer in the activity. Does the taxpayer spend substantial time in the activity? Were employee’s hired to assist in the operations?
  • The expectation that assets used in the activity will appreciate.
  • The prior success of the taxpayer in a similar or dissimilar activities. Has the taxpayer turned an unsuccessful business into a profitable one?
  • The history of the taxpayer in generating significant profits.
  • The relationship of the profits to the losses. Are the profits occasional in relation to years of larger losses?
  • The overall financial status of the taxpayer. Does the activity mean something to the taxpayer? Is it a source of needed cash flow or revenue?
  • The activity has a meaningful part of the taxpayers’ overall financial plan.
  • The profit motive or business purpose outweighs any elements of personal pleasure or recreation associated
    with the activity.

This list is not an all-inclusive list and no single factor weighs more or less than another. This is a highly litigated issue in the arena of taxation and there are hundreds, if not thousands of tax cases and court rulings that consider all of the facts and circumstances of any particular case.

This checklist is just a compilation of a lot of the issues and points that have been argued in the cases over the years – so treat them as a guideline.

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