Hobby Loss Rules
After 2017
The 2017 Tax Cuts and Jobs Act (TCJA) did not amend IRC Section 183 (see below)
But the TCJA disallows all miscellaneous itemized deductions that used to be subject to the 2% limitation for tax years 2018 through 2025.
In other words, gross profit from a hobby is taxable, but the operating expenses are not deductible. Gross profit means sales, less the cost of goods sold (COGS).
Operations that are properly run out of a C-corporation are not subject to the Hobby Loss Rules.
Before 2018
Hobby receipts are taxable.
Your taxable gross income includes income from whatever source unless there’s a specific exclusion, and there is
none for hobby income.
IRC Section 183 limits expenses from an activity not engaged in for profit (a hobby) to an amount not to exceed the income generated by the activity – subject to the following ordering system:
- Expenses that are deductible without regard to a profit objective. Examples include interest and real estate
taxes. - Expenses that would be deductible if the activity was engaged in for profit and do not cause a basis
adjustment. Examples are advertising, insurance, and utilities. - Expenses meeting the requirements in category 2 that result in a basis adjustment. This is where
depreciation and amortization come in.
Expenses in categories 2 and 3 are allowed only to the extent of the excess, if any, of income over allowable
expenses from category 1. Category 2 and 3 expenses are deductible, to the extent of the remaining hobby
income, as miscellaneous itemized deductions that are limited to the amount that is greater than 2% of your adjusted gross income (AGI).