By: A.J. Cook


It's time to look seriously for deductions to cut down that tax bill.

What about your hobby? Can you deduct those losses? Maybe.

Just because you enjoy doing something doesn't mean you can't deduct losses. The key: You must operate the activity to make a profit.

What does that mean, "operating to make a profit"? There is no definition. The answer comes from examples: court cases deciding the issue. By reviewing the judge's explanation for allowing or disallowing the loss, you can set a course for a solid deduction. Learn this week, while sympathizing with the losers; next week, while gloating with the winners.

Architectural engineer H. Connely Plunkett of Madison, Miss., got into mud racing. For the unsullied, this involves driving a four-wheel vehicle around a track deliberately turned into a mud hole. The winner gets $500–all probably needed to pay for laundry soap.

In two years Plunkett plunked down $39,000 for racing costs.

The court disallowed his losses. He had no prior experience in competitive driving; the profit potential from racing is low, and the activity is primarily recreational.

The Moral:  If your hobby is down and dirty, its profit potential better be up and coming.

Morris I. Cohen of Aurora, Colo., retired at 48 on a disability pension and became an attorney. When he tried to deduct losses from for his law practice, the court turned him down. The judge said he made no effort to drum up business. He had no listing in the yellow pages and spent no time promoting his practice, like attending community meetings or running for public office.

The Moral: You don't have to be Perry Mason, but you do have to try to make money.

When surgeon Thomas Burger developed a degenerative disease that would eventually make his right hand useless for operating, he decided to breed show dogs. Before he and his wife began, they learned about their new business: read books, attended seminars and consulted experts, including a legal and financial advisor. That's good.

They chose to raise Afghan hounds. Then they spent a bundle. That's bad. In keeping with the theme, they bought expensive Oriental artifacts for their home office and urns, a concrete Buddha and an Oriental iron gate for their yard.

The court disallowed their losses. They didn't keep expenses down, which made the chance for profit slim. It would be difficult to overcome the six years of losses of $240,000. More at Hobby vs. Business)

The Moral: Some deductions go to the dogs before they're out of the gate.

Planning Tip: These cases show that operating to make a profit include promoting your business, keeping costs in line, learning about your type of business, being able to reasonably project a profit.


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.
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Released 3-1-99