Why This Matters: Hobby Loss Rules
Presumption of a Profit
- The manner in which you conduct the activity;
- Your expertise in the subject;
- Time and money you spend on the activity;
- Any expectations that the activity’s assets will appreciate;
- Your prior success in similar activities;
- Your history of income or losses in the activity;
- The amount of profits the activity brings in;
- Your personal finances;
- Personal pleasure or elements of recreation associated with the activity.
Improving Your Position
There are specific steps you can take to improve your position, and help ensure that your business is actually a business, and not legally viewed as a hobby. First, prepare a comprehensive business plan, and whenever you refer to your business, make sure it’s clear that your goal is profit. Treat your business like a business. Keep record books the same way that a for-profit business keeps them, and have promotional activities to generate growth. Participate in educational opportunities that improve your knowledge of the business, and devote a fair amount of time to it. If you treat your activities like a hobby, then the IRS will do the same.
Be particularly careful if you’re engaged in an activity that is commonly considered a hobby. Make it abundantly clear that your business is different and goes beyond the activities of a hobbyist. Some examples of these oft-targeted activities include collecting antiques, coins, and stamps; raising thoroughbred dogs and horses; publishing philosophy pamphlets; travel writing; and auto racing. These are all activities that you can do for profit, but they can also be just a hobby, and as a result they get extra attention from the IRS.