Facts:
Agnes wanted a start a new business. She wanted an art gallery being an art major history
in college. To finance her capital, she borrowed $1,500,000 as capital from her husband to
rent and renovate the gallery and bring in art. She hired accountants and lawyers to make
her business run smoothly. In her 5 years of operations she incurred losses in the 4 years
and generated profit on the fifth year. Can she deduct her losses in years 1-4?
Issue:
Is the client operating as a for profit business or is it being operated as a hobby?
Conclusion:
Hobby loss rules limits your deductions claimed if the business activity is not engaged in
for profit. Under Section 183 of the Internal Revenue Code, the first presumption to
determine if a business is a hobby or profit is profitable for 3 out of 5 years. In the case of
Agnes, she only made profit on her fifth year which reflects as her hobby based on this
presumption.
On the other hand, this is not the only basis of determining if Agnes is engaged in for profit
or operating as a hobby. There are more analysis to determine the facts and circumstances
of her case. There are nine non-exclusive factors in section 183-2(b) deciding whether
Agnes is operating for a profit motive. These factors are: 1. The manner in which the
taxpayer carried on the activity, 2.The expertise of the taxpayer or his or her advisers, 3.