Business Expense Deductions versus Hobby Expense Deductions

Although the Intemal Revenue Code provisions concerning a business activity and a hobby activity have not significantly changed, CPAs should still familiarize themselves with best practices. The primary rule on this subject is that if an activity is a business in nature, a net loss (i.e., total related expenses exceed total related revenues) is tax deductible; on the other hand, if an activity is a hobby, a net loss is not tax deductible. Income tax regulations provide a nonexclusive list of relevant factors to consider in determining whether a taxpayer is engaged in an activity (trade or business) with the intent to make a profit. Whether the IRS or the taxpayer has prevailed has depended upon each case's specific fact pattern and the court's interpretation of each side's arguments. In some cases, the taxpayer has won part of the issues in dispute, but the IRS has been victorious in others.