The three scariest words in tax law are hobby loss rule. It’s not an exaggeration to say that this is one of the most unfair tax rules in all of the tax code.
If the IRS decides your business is a hobby, then you’re in deep doo-doo. In Tax Law Obliterates Hobbies, we explained how this outrageous law can easily cost you thousands of dollars (this is in addition to the money you lost on the activity).
It’s troublesome. It’s black magic. It can instantly turn a large or small monetary loss into a massive tax liability.
When you have a monetary activity, you can produce two polar-opposite tax results. You’ll either shout “woo-hoo!” or “boo-hoo!”
With a hobby loss activity, you get zero tax benefit from the loss (boo-hoo!) but this can be far more costly than simply losing the tax loss deduction. You could suffer taxes on what you thought was sheltered income because there is a tax rule that could cost you all of the deductions. Yep. It’s ugly. Taxes on the income and no deductions.
With a business activity loss and material participation, you create tax shelter by reducing your taxable income with those fully deductible losses (woo-hoo!).
Here’s good news—you can learn how to avoid the hobby rules and belong to that group of lucky taxpayers shouting woo-hoo. In this article, you learn three strategies that can help you beat those hobby loss rules and deduct every single penny of your losses. ... Log in to view full article.