In his influential book "The Wealth of Nations," published in 1776, the Enlightenment thinker Adam Smith wrote about how human beings like to "truck and barter."
Of course, the "truck and barter" diction seems a bit dated today. But the phenomenon Smith pointed to remains as timely as ever. Humans enjoy engaging in commerce and trade with each other.
Sometimes they do this for profit and sometimes they do it for fun. But should there be a tax deduction for activities that seem more like a hobby than a genuine revenue-seeking proposition?
You guessed it! In this post, we will discuss some of the basics of the classic tax law issue of "hobby loss."
The IRS has been dealing with questions of hobby loss for decades. Indeed, there is a specific section of the Internal Revenue Code (IRC 183) devoted to the issue.
The IRS acknowledges that income tax deductions for carrying on a business or trade or other activities intended to generate income are generally allowable.
But what if these activities repeatedly produce losses instead of profit?
If that happens, the IRS may claim that the activity is really a hobby and does not merit a deduction.
The IRS looks at several factors in making these determinations. For example, the agency looks at the time and effort that a taxpayer devotes to a given activity. The IRS will also ask whether a taxpayer has made a profit at the particular activity at least some of the time - and the degree to which losses may be outside of his or her control.
Even if an activity is a hobby, there may be deductions available. But they could not exceed the gross receipts that have been generated.
Source: IRS.gov, "Is Your Hobby a For-Profit Endeavor?" Accessed June 20, 2014