Just heard an accountant mention the "hobby loss rule" on a podcast and realized I claimed 3 years of losses on my freelance photography without knowing there's a limit.

She said if you don't show a profit in 3 out of 5 years, the IRS can reclassify your business as a hobby and disallow all your deductions, has anyone here actually been audited for this?

2 comments

2 Comments

colegarcia1d ago

3 years in a row of losses sounds like a red flag honestly.

sandragrant22h ago

A friend of mine had a small shop that lost money for 3 years straight. Everyone told her to close it down, but she kept tweaking things little by little. She changed her suppliers, cut back on stuff that wasn't selling, and started focusing on what people actually asked for. Fourth year she finally broke even, and by year five she was doing okay. I guess sometimes it's not a red flag, it's just a slow climb if you're learning as you go.