April 4, 2023 10:11 pm

Horse Breeding Activity Was a Hobby

Whether expenses of an activity are deductible depends on whether it is conducted for profit or is merely a hobby. If there is a profit motive, then income is reported but can be offset by deductible expenses. If there is no profit motive, the activity is a hobby for which all income is reported but no offsetting deductions are allowed at this time. The determination of a profit motive depends on the nine factors listed in the regulations (Reg. Sec. 1.183-2(b)). Recently, an appellate court agreed with the Tax Court and held that a taxpayer’s horse breeding farm was not an activity engaged in for profit so deductions were disallowed (Mitchel Skolnick, CA-3, 3/8/23).

Weighing the factors. No one factor is determinative, advised the court; all must be examined and weighed.

  1. The manner in which the taxpayer carries on the activity;
  2. The expertise of the taxpayer or his advisors;
  3. The time and effort expended by the taxpayer in carrying on the activity;
  4. The expectation that assets used in the activity may appreciate in value;
  5. The success of the taxpayer in carrying on other similar or dissimilar activities;
  6. The taxpayer’s history of income or losses with respect to the activity;
  7. The amount of occasional profits, if any;
  8. The financial status of the taxpayer; and
  9. Elements of personal pleasure or recreation

In this case, the court found that factor 7—the amount of occasional profits—and factor 9—elements of personal pleasure or recreation—favored the IRS and outweighed the other factors.

 

 

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Tax Glossary

Earned income

Compensation for performing personal services. You must have earned income for a deductible IRA or to claim the earned income credit.

More terms