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Distinguishing a business from a hobby, part 1: a photographer’s case

One of the classic issues in tax law is commonly known as “hobby loss.” It involves trying to distinguish between a hobby and a business activity.

It’s an important distinction because tax deductions and possible tax controversies are at stake. After all, many people engage in activities they enjoy that may bring in income, but arguably don’t qualify for the types of tax deductions available for business expenses. And other people engage in activities that are intended to make money, but may end up losing it.

In this two-part post, we will provide an introduction to the concept of hobby loss in the context of a recent case from the U.S. Tax Court.

The case concerns a photographer who sought to emulate the work of Ansel Adams in creating memorable images of the American West.

The photographer took pictures with a traditional camera, and then used software to digitize and make changes in the images. In finished form, some of the images were displayed on canvas. Others were on metal or paper.

Over the course of three years, from 2008 to 2010, the venture had net losses of about $25,000.

The IRS took the position that tax deductions for business expenses that the photograph took were impermissible. In other words, the IRS claimed that the Ansel Adams aficionado had suffered a hobby loss.

But the photographer contended his deductions for business expenses were legitimate and challenged the IRS in tax litigation. In part two of this post, we will discuss how the U.S. Tax Court applied the 9-factor test in U.S. tax regulations to distinguish a hobby from a business.

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