Hobby Loss Rules

A treasury audit examines tax impact of abusive hobby loss deductions by high-income taxpayers (Audit Report No. 2007-30-173)

This new audit by the Treasury Inspector General for Tax Administration (TIGTA) has found that actions must be taken to prevent taxpayers from continually deducting losses in potentially not-for-profit (i.e., hobby) activities to reduce their tax liabilities.

The audit focused on IRS efforts to address noncompliant, high-income small business and self-employed taxpayers who claim business losses using Schedule C for activities considered to be not-for-profit. For purposes of the audit, TIGTA categorized taxpayers with total income sources of $100,000.00 or greater to be "high-income taxpayers".

In general, if a taxpayer has hobby income and expenses, the expense deduction is limited to the hobby income amount.

Approximately 1.5 million taxpayers, many with significant income from other sources, filed Form 1040 Schedules C showing no profits, only losses, over four consecutive years running 2002 to 2005.

The IRS has provided a fact sheet to encourage compliance. This may be helpful to use if you are wondering if your hobby is for profit or if you are in danger of an audit. You will find a reproduction of the fact sheet on the Hobby Loss Rule article.