What differentiates a business loss from a hobby loss? What is an example of a gift that could be classified as an entertainment expense?© BrainMass Inc. brainmass.com October 1, 2020, 11:15 pm ad1c9bdddf
What differentiates a business loss from a hobby loss?
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, be clear about the fact 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 aid in making a decision about a hobby loss. 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 profit motive where the taxpayer carries on the activity in accordance with such practices. Where a taxpayer has such preparation or procures such expert advice, but does not carry on the activity in accordance with ...
The solution demonstrates the difference between business and hobby activities using nine paragraphs of explanation from the regulations. Gift vs. entertainment is cited for an answer.