By: A.J. Cook


You can enjoy your hobby even more if it's cutting your tax bill.

Deduct hobby losses if you can prove you have a profit motive. Court cases show us how.

Richard and Irene Yancy of East Cleveland, Ohio, had other jobs. He worked as a truck driver and steel worker while she had a part-time job. Their real love was horses. They invested in 15 racehorses for breeding and selling. But they backed the wrong horses. In two years they lost $33,478.

The court allowed the deductions because the couple bought books and attended seminars on horse breeding and financed their horses out of wages with no other wealth to fall back on.

The Moral: Some cases are winners out of the gate.

Dog lover Paul Harris of Granville County, N.C., worked in a knitting mill. He enjoyed hunting quail and working dogs to locate the birds. He had a natural talent for sniffing out good dogs and training them. But after two years as a dog trainer, he was still losing money, so he quit.

The court allowed his losses. He stopped when he realized he didn't have time to do the job properly and was only a little behind. The judge said Harris demonstrated he was in the business for a profit.

The Moral: Having a nose to track down a deduction is only half the job; the other half is knowing when to quit.

William Daugherty grew up on the family hay farm near Chili, N.Y. During the depression the family lost the farm. Later Daugherty earned enough to buy back his boyhood home. He worked it on weekends and took vacations to supervise the harvest.

The judge allowed his losses, saying it was bad weather that caused the problem. Daugherty worked hard, kept good books and took remedial measures to correct problems.

The Moral: A hobby worked in a businesslike manner produces a deduction.

Sometimes the Internal Revenue Service argues the activity is a tax shelter, so taxpayers must satisfy extra rules as well. However, if it's not just an investment, but rather an activity where the taxpayer does nearly all the work himself, he shouldn't be required to meet these additional onerous requirements. (More at Hobby vs. Business)

Planning Tip: A hobby qualifies for a tax break if money-making is a major goal. Build a case to prove this: keep good records, consult experts or study to become one, determine why you lose money and figure out how to stop, show, with reasonable projections, that your activity can be profitable.

A.J. Cook is a lawyer and CPA. His tax column appears weekly in numerous newspapers. Why isn't it published in your hometown newspaper? Ask its Business Editor to subscribe.

Copyright © 1987-2001 A.J. Cook All Rights Reserved
This information is not intended for use without professional advise.
Disclaimer
Released 3-8-99