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YOU CAN LOSE MONEY, AS LONG AS YOU ARE TRYING TO MAKE SOME

August 21, 2008

The IRS has issued a new "fact sheet" (FS-2008-23) on the so-called "hobby loss" rules of Code Section 183. The tax law itself doesn't use the term "hobby loss"; it revers to "activities not engaged in for profit." Even if you aren't having any fun at all, the IRS will disallow loss deductions if they think you aren't serious about trying to show a profit.

The fact sheet lists the following factors the tax law uses to determine whether there is a profit objective:

* Does the time and effort put into the activity indicate an intention to make a profit?
* Do you depend on income from the activity?

* If there are losses, are they due to circumstances beyond your control or did they occur in the start-up phase of the business?

* Have you changed methods of operation to improve profitability?

* Do you have the knowledge needed to carry on the activity as a successful business?

* Have you made a profit in similar activities in the past?

* Does the activity make a profit in some years?

* Do you expect to make a profit in the future from the appreciation of assets used in the activity?

The classic "bad facts" under the hobby loss rule would be someone with a full-time job - say, a dentist - who offsets a high level of salary income with losses from a farm - maybe a horse farm - that never comes close to showing a profit. Multi-level marketers also frequently have trouble with the hobby loss rules.

If you are really trying to make a living from your business, Section 183 isn't a problem. If you're just playing at it because you like the tax deduction, you have a problem.

Tags: hobby loss.section 183.