A hobby loss refers to losses incurred by a taxpayer in an activity not pursued for profit. Hobby losses are deductible only to the extent of income generated by the hobby. An activity that generates a profit in three of five years is presumed to be operated for profit.
The Loss Denial Rule, often referred to in tax contexts, precludes taxpayers from claiming deductions for expenses or losses associated with activities not engaged in for profit, commonly referenced as 'hobby losses.'
Profit motive refers to the desire to earn a favorable financial return on a business venture. Without a profit motive, tax losses from an activity may be considered a hobby loss, which are only deductible to the extent of income.
