November 8, 2018 2:00 am

Hobby Loss Rule Doesn’t Apply to C Corporations

If you conduct an activity without a profit motive you can prove, then the hobby loss rule applies. Under the Tax Cuts and Jobs Act, you have to report all of your income (nothing has been changed here), but can’t deduct any of your expenses. This is because of the suspension of the miscellaneous itemized deduction subject to the 2%-of-adjusted-gross-income threshold. The hobby loss rule applies to individuals, and not to C corporations.

In a recent case, a person in business did cowboy mounted shooting on the side. He entered contests and had various costs (e.g., entry fees, horse trailer). He had some success, but his expenses outstripped his winnings. The IRS said he couldn’t take deductions because the activity was a hobby. But the Tax Court said that since he conducted the cowboy mounted shooting through a C corporation, the corporation could claim the deductions (Potter, TC Memo 2018-153). The Tax Code’s hobby loss rule does not apply to C corporations.

Tax Glossary

Private letter ruling

A written determination issued to a taxpayer by the IRS that interprets and applies the tax laws to the taxpayer’s specific set of facts. A letter ruling advises the taxpayer regarding the tax treatment that can be expected from the IRS in the circumstances specified by the ruling. It may not be used or cited as precedent by another taxpayer.

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