Under IRC § 162, ordinary and necessary business expenses are generally deductible if they result from a trade or business. Similarly, under § 212, expenses relating to the production of income or to investment activities are also generally deductible. Perhaps most notably, a deduction permitted by § 162 or § 212, may be offset against unrelated income if necessary.
The “hobby loss” rules of § 183 limit the deductions of taxpayers that relate to activities not engaged in for profit. Under § 183, a taxpayer may deduct expenses only to the extent the taxpayer has gross income from the § 183 activity during a tax year. The IRS has sometimes used § 183 to attack various tax shelter activities. Even if most business deductions are disallowed by § 183, it does not apply to deductions that do not require a profit motive, such as deductions for interest and taxes.
An activity not engaged in for profit’ means any activity other than one with respect to which deductions are allowable for the taxable year under § 162 or under paragraph § 212(1) or § 212(2). IRC 183(c).
IRC 183 was originally adopted primarily to curtail the deduction of farm hobby losses. IRC 183 has been applied to a wide variety of activities including: acting, 4 art work, writing, auto racing, gunsmithing, practicing law, making movies and videotapes, operating a talent agency, dog breeding, horse breeding, cattle ranching, farming, operating a bed and breakfast, aircraft rentals, 5boat chartering, boat racing, fishing, golfing, venture capitalization, used car sales, mining and drilling, sound recordings, Amway distributorships, tax shelters, and drag racing. In addition to the foregoing, the IRS has also identified photography, stamp collecting, bowling, gambling, motocross racing, horse racing, artists, entertainers, and craft sales as possible IRC 183 activities.