Hobby loss rule raises its ugly head

Industry Observer with Green Krist CPA PLLC 34463

I am bringing to your attention some recent developments regarding the “hobby loss rule.” Given that you have diverse sources of income, some of which might be considered hobbies, I believe this information could be of great importance to you.

What Is the Hobby Loss Rule?

The hobby loss rule might apply to you if you have any activity that results in a tax loss. Under this rule, you might lose out on your deductions and end up paying taxes on the income you earned from the hobby.

For instance, if you earned $200,000 from a hobby and incurred expenses of $350,000, the rule would lead you to pay taxes on the $200,000 of hobby income, even though you suffered a net loss of $150,000. That would be unpleasant since you would be out of pocket $150,000 and paying taxes on $200,000.

Recent Developments

A significant recent case resolved in 2023 involves Carl and Leila Gregory, who chartered their yacht, Lady Leila, in 2014 and 2015, not for profit but as a hobby. Even though they generated income from this activity, they also had significant expenses. The IRS denied the deductions, and the courts agreed, which resulted in the Gregorys owing an additional $267,221 in taxes.

The takeaways from this case are:

  • Depth of Impact. The hobby loss rule can have profound tax implications for individuals, partners, and S corporations if they are involved in activities that produce a tax loss.
  • Income Irrespective. The hobby loss rule applies irrespective of the income generated—be it $20,000 or in the hundreds of millions.
  • Understanding Is Crucial. The Gregory case applied to 2014 and 2015 when the hobby loss rule allowed hobby deductions up to the amount of hobby income but made the expenses itemized deductions subject to the 2 percent of adjusted gross income floor. Things are worse today: you can’t deduct any hobby expenses other than the cost of sales.

Green Krist, CPA  specializes in assisting taxpayers with IRS and North Carolina Department of Revenue issues in the greater Raleigh, North Carolina area.

Comments (3)

Kat Palmiotti
406-270-3667, kat@thehousekat.com, Broker/REALTOR® - Kalispell, MT
Helping your Montana dreams take root

Yikes! First, I cannot imagine ever making more than a few hundred dollars from a hobby! I'm actually not surprised expenses can't be used for tax purposes when it's a hobby but that would have been quite a surprise for the yacht owners!

Sep 10, 2023 06:28 AM
Bill Salvatore - East Valley
Arizona Elite Properties - Chandler, AZ
Realtor - 602-999-0952 / em: golfArizona@cox.net

Great information. Thanks for sharing, enjoy your weekend, and

here's a GOOD LUCK to your favorite Football Team! Bill

Sep 10, 2023 10:41 AM
Charles Ross - eXp Realty LLC
eXp Realty LLC Salina Group - Salina, KS
Love To Help People

Excellent post.Thank you for sharing. Have a wonderful day and a blessed week

Sep 11, 2023 01:26 AM