Blog · 15 October 2026

Hobby vs Business in 2026: Section 183 Hobby Loss Rules, the Nine Factors, Form 5213 and What US CPA Firms Should Tell Clients

By Keshav Bansal, CA

The hobby vs business question has no checkbox. Under the section 183 hobby loss rules, the answer depends on whether the client carries on the activity to make a profit, and that is judged from the facts. Katie Palmer of Dufour Accountants, an Archer Lewis firm, made the same point on Oct. 6, 2026: there is no box you check that turns a hobby into a business. The answer matters more now. Hobby income is still taxable, the related expenses are generally not deductible, and the One Big Beautiful Bill Act removed the 2025 end date for that treatment. For US CPA firms it comes up with side ventures, horse operations and collectors that keep losing money.

What section 183 actually does

IRC §183(a) says that if an individual or an S corporation carries on an activity “not engaged in for profit,” no deduction attributable to it is allowed except as §183 provides. Section 183(c) defines that phrase as any activity whose deductions are not allowable under §162 (trade or business) or §212(1) or (2) (production of income). Under §183(b), other deductions are allowed only to the extent the activity’s gross income exceeds deductions that are allowable anyway. IRS fact sheet FS-2022-38 states the practical result: if the activity isn’t carried on to make a profit, a loss from it can’t offset other income. The IRS says the limit applies to individuals, partnerships, estates, trusts and S corporations, but not to C corporations.

The nine factors in Treas. Reg. §1.183-2(b)

The regulation says all facts and circumstances count, that no single factor decides the case, and that the outcome does not come from counting factors on each side. It lists nine factors that should normally be considered:

1. Manner of carrying on the activity: a businesslike operation, complete and accurate books, and changing methods to improve profitability.
2. Expertise of the taxpayer or advisors: studying accepted practices or consulting experts, and following that advice.
3. Time and effort: especially where the activity has few recreational aspects. Hiring competent people can offset limited personal time.
4. Expectation that assets will appreciate: “profit” includes appreciation in assets such as land.
5. Success in other activities: having turned similar ventures profitable before.
6. History of income or losses: start-up losses, and losses from drought, disease, fire, theft, weather or depressed markets, don’t necessarily point to a hobby. Unexplained losses that continue past the usual start-up period can.
7. Amount of occasional profits: a small profit next to large losses proves little; a substantial occasional profit counts more.
8. Financial status: substantial other income, especially when the losses produce tax benefits, can suggest no profit motive.
9. Personal pleasure or recreation: relevant, but enjoyment alone doesn’t make it a hobby if other factors show a profit objective.

A 2023 IRS tax tip put it plainly: “No single thing is the deciding factor,” and “good recordkeeping is always key.”

The 3-of-5-year presumption (2 of 7 for horses)

Section 183(d) creates a presumption. If the activity’s gross income exceeds its deductions in 3 or more of the 5 consecutive taxable years ending with the current year, the activity is presumed to be engaged in for profit “unless the Secretary establishes to the contrary.” For an activity that consists in major part of breeding, training, showing or racing horses, the test is 2 of 7 years. The IRS can rebut it, and missing it doesn’t automatically make the activity a hobby. The nine factors still decide.

How a hobby is reported now

Hobby income is not exempt. IRS Publication 525 (2025) says income from an activity not engaged in for profit, such as “a hobby or a farm you operate mostly for recreation and pleasure,” goes on Schedule 1 (Form 1040), line 8j. It also says hobby losses aren’t deductible from other income.

The expenses are where clients get hurt. IRS Publication 529 explains that hobby expenses are miscellaneous itemized deductions, which “can no longer be deducted.” IRC §67 now provides that no miscellaneous itemized deduction is allowed for any taxable year beginning after December 31, 2017. The Tax Cuts and Jobs Act suspension originally ran through 2025; P.L. 119-21 (OBBBA) §70110 removed the end date. The result can be gross hobby income taxed with no offset for its costs.

The business side has costs too. Under IRC §1402(a), net earnings from self-employment come from a “trade or business,” so a profitable Schedule C activity generally carries self-employment tax (see our self-employment tax guide). Business status can also open the QBI deduction, which applies only to a qualified trade or business (see our section 199A guide). Run the numbers both ways.

Form 5213: postponing the presumption test

A new activity can elect under §183(e) to postpone the presumption determination by filing Form 5213. According to the form’s instructions, it is filed by individuals, estates, trusts, partnerships and S corporations, and it postpones the determination until the end of the 4th tax year (6th for horse activities) after the first year of the activity. Key mechanics:

• File within 3 years after the original due date (without extensions) of the return for the first year of the activity. If the IRS sends a written notice proposing to disallow §183 deductions, file within 60 days of the notice. The 60 days don’t extend the 3-year limit.
• It isn’t available once the activity has run more than 5 years (7 for horses).
• On a joint return, both spouses must elect, even if only one carries on the activity.
• It automatically extends the assessment period for deficiencies attributable to the activity until 2 years after the due date of the return for the last presumption-period year.

That is the real cost: Form 5213 buys time but keeps the presumption years open.

A 1099 doesn’t decide it

Palmer notes that receiving a Form 1099-NEC does not by itself establish a business. Information returns report payments; they don’t classify activities. Our Form 1099-NEC threshold guide covers the reporting side.

CPA checklist for hobby loss rules

1. Flag Schedule Cs with repeated losses, plus horse, farm and collecting activities.
2. Test §183(d) year by year. Gross income must exceed deductions, determined without regard to profit motive.
3. Document the nine factors: business plan, separate accounts, changes after losses, time logs.
4. For new activities, weigh Form 5213 timing against the longer assessment period.
5. For a hobby, report income on Schedule 1 line 8j and warn that expenses generally aren’t deductible.
6. Compare SE tax and QBI results under each classification.

Where this fits for Tax Brew readers

Hobby loss reviews depend on clean books. If your firm needs extra capacity, Tax Brew offers outsourced bookkeeping and accounting support for US CPA firms. Email info@taxbrewglobal.com.

Sources: IRC §§67, 183, 1402(a) (Cornell LII); Treas. Reg. §1.183-2(b); IRS Form 5213 (Rev. February 2006) and instructions; IRS Publication 525 (2025); IRS Publication 529 (12/2020); IRS Fact Sheet FS-2022-38; IRS Tax Tip 2023-61; P.L. 119-21 §70110; Katie Palmer, Dufour Accountants / Archer Lewis (Oct. 6, 2026). General information, not tax or legal advice. Sources as of 15 October 2026.