Hobby Loss Rule Checker
Business or hobby? Score yourself on the IRS's nine factors before deducting losses
—
Business-Like Score
—
Likely Classification
—
3-of-5 Safe Harbor
Business or hobby? Score yourself on the IRS's nine factors before deducting losses
The hobby-loss rule (Section 183) decides whether your money-losing venture is a business — losses deduct against your other income — or a hobby, where (post-2018) income is fully taxable while expenses deduct nothing. The IRS decides by a nine-factor profit-motive test plus a bright-line presumption: profit in 3 of the last 5 years and you're presumed a business. This checker turns the factors into an honest scorecard and tells you which side of the line your documentation currently supports.
| Business | Hobby (post-2018) | |
|---|---|---|
| Income | Taxable (minus expenses) | Fully taxable |
| Expenses | Fully deductible | Not deductible at all |
| Losses | Offset W-2 and other income | Nonexistent for tax purposes |
| Example: $8k revenue, $12k costs | −$4k loss deducts (≈$900–1,300 saved) | $8k added to taxable income (≈$1,800 owed) — a $3k swing |
The 2018 change made hobby status genuinely punitive — hobby sellers on Etsy/eBay owe tax on gross-ish income with no cost offsets (inventory cost of goods sold survives; nothing else does). The stakes are why the factors deserve twenty minutes.
Courts weigh them unevenly. The heavyweights in actual cases:
Profit in 3 of 5 consecutive years (2 of 7 for horses) shifts the burden to the IRS. Legitimate tactics around it: timing year-end invoices and purchases to engineer modest profitable years, electing Form 5213 to postpone the determination until five years exist (rarely wise — it flags you), and remembering the presumption cuts both ways: even without it, a well-papered profit motive wins cases; with it, sloppy books can still lose them.
It depends on your operation, not the platform: separate finances, real pricing strategy, and effort toward profit make a business; casual crafting that recovers some costs is a hobby. The checker's factor list IS the audit conversation.
Post-2018, only cost of goods sold (what the items you sold cost you) nets against sales. Fees, supplies beyond COGS, mileage, home office — all gone. It's the harshest cliff in small-business taxation.
It helps the history factor and counts toward 3-of-5. Serial $200 profits among $10k losses look engineered, though — courts notice token profits (factor 7). Meaningful profitability in some years is the pattern that persuades.
Schedule C losses offsetting high W-2 income, year after year, in pleasure-adjacent industries — the exact pattern DIF scoring flags. Three straight loss years against a $200k salary invites the letter.
An LLC alone changes nothing — courts say so explicitly. The same money spent on a bookkeeper, a business account and a written plan moves factor 1, which actually decides cases.
Contemporaneous books, a business plan with dated revisions, time logs, evidence of expertise-seeking (courses, consultants), and correspondence showing profit-seeking behavior (price negotiations, marketing pushes). Winners bring binders; losers bring passion.
Yes — your answers never leave the browser.
Answer the nine factors like an auditor, and the path is obvious: either invest the modest effort that makes your venture audit-proof, or enjoy the hobby and stop deducting it. Both are fine choices — the expensive one is drifting between them.