Question

1. Hobby Losses The hobby loss rules (I.R.C. Section 183) are designed to prevent taxpayers from deducting, by claiming them as business expenses, what are really just the expenses of their hobby or amusement type of activity. For example, I may like to go fishing. I might set myself up as a "charter captain", offering to take people fishing for hire. It is easy to get a license for that, and I could then try to deduct the cost of my boat, my gas, my fishing equipment etc. But maybe I do not advertise, and rarely or never take anyone out fishing. But now I deduct all my fishing expenses. That would be an obvious "hobby loss", not deductible. How about this one? A man is making a lot of money in business, and is in the highest tax brackets. He invests a lot of money to buy 300 acres of farmland, and hires some help, and uses his family members, to build a golf course. He operates the course like a true business. He advertises quite a bit, has a paid staff, managers, good parking, and gets a lot of public play. It in fact operates like a regular public golf course in every way. But it loses money every single year. For 15 years straight, and the owner deducts these losses against his high regular income from his other businesses. Is he in danger of the IRS coming in and saying this is just a hobby, and should not be deductible?

Answer 1

If an activity is not for profit, losses from that activity may not be used to offset other income. An activity produces a loss when related expenses exceed income. The limit on not-for-profit losses applies to individuals, partnerships, estates, trusts, and S corporations. It does not apply to corporations other than S corporations.

However since the man here is operating a golf course like a true business and there is no element of being this a hobby and consequently not deductible. Since he would have paid tax even if the business was in profits, there is no reason why he should not deduct the losses too. Thus he is no danger, even if IRS probes, they can be given representation of facts of the case.