IRS study finds lots of businesses might really be hobbies

May 11th, 2016 → 6:41 pm @

From the Tax Prof Blog

The Treasury Inspector General for Tax Administration (TIGTA) today publicly released its audit report of the Internal Revenue Service’s (IRS) methods of addressing taxpayers who take business tax deductions for activities not engaged in for profit (i.e. hobbies).

TIGTA found that the IRS does not maximize the use of all relevant and available taxpayer information to identify hobby losses, and when returns containing potential hobby losses are selected for audit, the examiners do not always address the hobby loss issues. …

TIGTA’s evaluation of IRS data from Processing Years 2011 through 2014 identified 9,699 individual returns from Tax Year 2013 that claimed a Schedule C loss of at least $20,000, gross receipts of $20,000 or less, and reported wages of at least $100,000. The taxpayers also reported losses in four consecutive years (Tax Years 2010 to 2013).

TIGTA’s review of a statistically valid sample of 100 returns determined that 88 returns (88 percent) showed an indication that the Schedule C businesses were not engaged in for profit. TIGTA estimates that 7,511 returns in the total sample population of taxpayers may have inappropriately used hobby loss expenses to reduce taxes by as much as $70.9 million for Tax Year 2013.


88 out of 100 returns with Schedule C (Business Income) losses that might really be hobbies is an astonishingly high number!

TIGTA recommended that the IRS do more research to identify individual returns with Schedule C losses in more than one year that may indicate they are really hobbies (and the losses would not be allowed).

That means you as a writer need to be conducting your business as a business to avoid an IRS audit of your tax return, especially if you’ve had several years of losses.


How do you look like a business and not a hobby?

  • keep thorough records
  • have  separate business checking and credit cards accounts
  • obtain the proper licenses. Writers rarely need a business license, but they do need a vendors license (to collect and pay sales tax) if selling their own books.


For more tips on conducting your writing as a business and not a hobby, read my book Business Tips and Taxes for Writers

or hire me to conduct a webinar for your writers group.

Carol Topp, CPA





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