What is it that differentiates a business loss from a hobby loss?© BrainMass Inc. brainmass.com December 15, 2020, 3:59 pm ad1c9bdddf
In a sentence, the difference is a profit motivation, but that term is not specific enough for taxing authorities to argue with taxpayers as to whether the loss truly is a business loss.
First, I should point out that hobby losses are not deductible. Hobby profits, on the other hand, are income and magically become a business. Maybe then, the 'bottom line' difference between a business and a hobby is profits.
The Regulations provide excellent guidance to be used to measure the business purpose of an activity. Certainly there are businesses that lose money, but a review of the nine following characteristics which aid to making a decision about a hobby loss are important. These characteristics are not all-inclusive, and it doesn't require all nine to meet the test. It is very much a 'facts and circumstances' discussion.
Please review the website from which the following information came, and note there are examples following the nine rules. http://www.taxalmanac.org/index.php/Reg._1.183-2
(1) Manner in which the taxpayer carries on the activity. The fact that the taxpayer carries on the activity in a businesslike manner and maintains complete and accurate books and records may indicate that the activity is engaged in for profit. Similarly, where an activity is carried on in a manner substantially similar to other activities of the same nature which are profitable, a profit motive may be indicated. A change of operating methods, adoption of new techniques or abandonment of unprofitable methods in a manner consistent with an intent to improve profitability may also indicate a profit motive.
(2) The expertise of the taxpayer or his advisors. Preparation for the activity by extensive study of its accepted business, economic, and scientific practices, or consultation with those who are expert therein, may indicate that the taxpayer has a ...
The solution explains the difference between a business loss and a hobby loss. Then the solution cites the rules taken from the IRS regulations which aid auditors in determining whether a loss is a hobby or a business. These decisions are not black and white but more based on facts and circumstances of each case.