Tax Minute

HOBBY LOSS

In order to deduct a loss from a business it must be from an activity engaged in for profit, not from a hobby. Sounds simple, but how do you make the distinction? Most new businesses lose money their first year, so does that make it a hobby? The answer is - it depends. The IRS says that an activity is not a hobby if it turns a profit in any three of five consecutive tax years. However, not turning a profit does not mean the activity is a hobby. Just take a look at the auto industry a decade ago. If you can show that you are operating the business with the intention of making a profit, the activity will generally be deemed a business. However, if your "business" is something like restoring antique cars in your driveway and it costs you more for the parts than you can sell the restored cars for, it would be deemed a hobby. Your gross income from a hobby is reported as "other income" on Form 1040 and is not subject to self-employment tax. However, due to the changes in the tax law enacted in 2018, the expenses associated with your hobby income are no longer deductible.

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