Hobby Loss Rules

The IRS hobby loss rules limit deductions for activities that are not carried on with a genuine profit motive. A common misconception is that three consecutive years of losses automatically turns a business into a hobby - that is not how the rule works. The three-year profit test is a safe harbor that shifts the burden of proof to the IRS, but failing to meet it does not mean automatic reclassification. What matters is whether you are engaged in the activity in a businesslike way with a real intent to make a profit - and the IRS looks at nine specific factors to make that call.