ABSTRACT:

Business activities that resemble a hobby or recreational activity often receive close scrutiny by the IRS when reported on tax returns. Normally, a taxpayer engaged in a “for profit†activity is entitled to deductions against income for a variety of expenses. However, the deductibility of hobby related expenses is much more limited.

This paper will discuss the potential tax consequences of the alternative classification of a “for-profit business activity†versus a “hobby activityâ€.  Additionally it will analyze the tax regulations of 1.183 that provide a non-exclusive nine factor list of considerations.  The IRS and the courts utilize these to determine whether an activity is engaged in “for profitâ€. This paper will also examine recent Tax Court cases where the Court employed the nine factor analysis. Conclusions and practical steps will be presented from these cases to assist taxpayers in avoiding the pitfalls of Section 183.