Do you have a sideline activity that you think of as a business?

From this sideline activity, are you claiming tax losses on your Form 1040?

Will the IRS consider your sideline a business and allow your loss deductions?

The IRS likes to claim that money-losing sideline activities are hobbies rather than businesses. The federal income tax rules for hobbies have been anti-taxpayer for years, and now an unfavorable change enacted in the Tax Cuts and Jobs Act (TCJA) made things even worse for 2018-2025.

If you have such an activity, we should have your attention.

Here’s the deal: if you can show a profit motive for your now-money-losing sideline activity, you can classify that activity as a business for tax purposes and deduct the losses.

In this article, we give you what you need to know about the federal income tax rules for hobbies and how to tilt the playing field in your favor.

But first, let’s cover the necessary background information. Onward.

Tax Rules for Hobbies

If you operate an unincorporated for-profit business activity that generates a net tax loss for the year (deductible expenses in excess of revenue), you can usually deduct the loss currently on your Form 1040.1

The business loss deduction

offsets taxable income from other sources;

reduces your federal income tax bill accordingly; and

reduces your ... Log in to view full article.