What is the IRS hobby loss rule for small businesses?
The IRS hobby loss rule, under Section 183 of the tax code, limits tax deductions for activities the IRS does not consider profit-motivated. If a business fails to earn a profit in at least three of five consecutive tax years, the activity may be reclassified as a hobby rather than a for-profit enterprise. Hobby losses cannot offset other income, which eliminates a significant tax benefit. To avoid reclassification, business owners should maintain a written business plan, formal records, a dedicated Home office, and consistent bookkeeping to demonstrate genuine profit intent to the IRS.
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