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What is the Hobby Loss Rule?

Home » Self-Employed » What is the Hobby Loss Rule?

Ever dreamt of turning your passion into profit? The good news is, some business expenses are tax-deductible. But the IRS has a “hobby loss rule” to prevent people from deducting losses on activities they don’t truly intend to make money from.

Here’s the key: Can you prove your activity is a real business, not just a hobby?

Signs You’re Running a Business:

  • Profits in Past Years: Consistently earning a profit in at least 3 out of the last 5 years is a strong indicator.
  • Dedication and Expertise: Demonstrate you have the skills and actively pursue success.
  • Time and Effort: Invest significant time and resources into running the business.
  • Reasonable Expectation of Profit: Show evidence of future profitability or past success in similar ventures.
  • Adaptability: Are you willing to change strategies to improve profitability?

If It’s a Hobby:

Losses can’t be deducted beyond the income generated by the activity. However, some deductions are still allowed on Schedule A (Form 1040).

Consult a tax professional to determine if your activity qualifies as a business. The IRS website offers additional resources on the hobby loss rule.

Image by bridgesward from Pixabay

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