The Hobby Loss Rule Part III: Audit Mitigation

From the Desk of Lauran L. Stevenson
The Hobby Loss Rule Part III: Audit Mitigation

Ensuring that the activity will be considered engaged in for profit means that there must be pre-audit due diligence. The auditor must determine the true motive of the taxpayer and should apply the nine factors enumerated in Reg. §1.183-2(b) to their activity (See “The Hobby Loss Rule: Determining Factors Part II” for the list of factors).

Whether or not to take the reporting position that an activity is for profit will be based on a determination on the subjective intent of the taxpayer from objective factors, which is not always an easy task. You should not forego your common sense when determining whether or not to include an activity as a hobby or a trade or business.

Taxpayers who operate an activity as if it were a business and that continuously try to improve that business, are more likely than not engaged in the activity for a profit. Similarly, the financial status of the taxpayer is important, because as a matter of common sense, those who are in need of income will most likely be engaged in an activity for the income and not merely for enjoyment.

In case you missed recent posts: Hobby Loss Rule Part I and Hobby Loss Rule Part II