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September 2013 » Business Expense Deductions versus...
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Jack R. Fay, PhD, CPA, and Melvin L. Roush, PhD, CPA
Although the Internal Revenue Code (IRC) provisions concerning a business activity and a hobby activity have not significantly changed, CPAs should still familiarize themselves with best practices. The primary rule on this subject is that if an activity is a business in nature, a net loss (i.e., total related expenses exceed total related revenues) is tax deductible; on the other hand, if an activity is a hobby, a net loss is not tax deductible. Furthermore, the expenses related to a hobby activity (up to the amount of revenues) are deductible only when itemized and must be deducted in a particular order; for example, any related mortgage interest and real estate taxes must be deducted first. There are no carryovers for excess expenses related to a hobby; consequently, any expenses in excess of revenues are lost forever.
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