Hello Bugbear,
Here is the actual text of the regulation.
http://ecfr.gpoaccess.gov/cgi/t/text/text-idx?c=ecfr;rgn=div8;view=text;node=26%3A3.0.1.1.1.0.2.71;idno=26;sid=74abfa6a352daf4cb2f4a07f07e2639c;cc=ecfr
Electronic Code of Federal Regulations (e-CFR)
BETA TEST SITE
e-CFR Data is current as of December 12, 2005
Title 26: Internal Revenue
PART 1?INCOME TAXES
Itemized Deductions for Individuals and Corporations (Continued)
Browse Previous | Browse Next
§ 1.183-2 Activity not engaged in for profit defined.
(a) In general. For purposes of section 183 and the regulations
thereunder, the term activity not engaged in for profit means any
activity other than one with respect to which deductions are allowable
for the taxable year under section 162 or under paragraph (1) or (2)
of section 212. Deductions are allowable under section 162 for
expenses of carrying on activities which constitute a trade or
business of the taxpayer and under section 212 for expenses incurred
in connection with activities engaged in for the production or
collection of income or for the management, conservation, or
maintenance of property held for the production of income. Except as
provided in section 183 and §1.183?1, no deductions are allowable for
expenses incurred in connection with activities which are not engaged
in for profit. Thus, for example, deductions are not allowable under
section 162 or 212 for activities which are carried on primarily as a
sport, hobby, or for recreation. The determination whether an activity
is engaged in for profit is to be made by reference to objective
standards, taking into account all of the facts and circumstances of
each case. Although a reasonable expectation of profit is not
required, the facts and circumstances must indicate that the taxpayer
entered into the activity, or continued the activity, with the
objective of making a profit. In determining whether such an objective
exists, it may be sufficient that there is a small chance of making a
large profit. Thus it may be found that an investor in a wildcat oil
well who incurs very substantial expenditures is in the venture for
profit even though the expectation of a profit might be considered
unreasonable. In determining whether an activity is engaged in for
profit, greater weight is given to objective facts than to the
taxpayer's mere statement of his intent.
(b) Relevant factors. In determining whether an activity is engaged in
for profit, all facts and circumstances with respect to the activity
are to be taken into account. No one factor is determinative in making
this determination. In addition, it is not intended that only the
factors described in this paragraph are to be taken into account in
making the determination, or that a determination is to be made on the
basis that the number of factors (whether or not listed in this
paragraph) indicating a lack of profit objective exceeds the number of
factors indicating a profit objective, or vice versa. Among the
factors which should normally be taken into account are the following:
(1) Manner in which the taxpayer carries on the activity. The fact
that the taxpayer carries on the activity in a businesslike manner and
maintains complete and accurate books and records may indicate that
the activity is engaged in for profit. Similarly, where an activity is
carried on in a manner substantially similar to other activities of
the same nature which are profitable, a profit motive may be
indicated. A change of operating methods, adoption of new techniques
or abandonment of unprofitable methods in a manner consistent with an
intent to improve profitability may also indicate a profit motive.
(2) The expertise of the taxpayer or his advisors. Preparation for the
activity by extensive study of its accepted business, economic, and
scientific practices, or consultation with those who are expert
therein, may indicate that the taxpayer has a profit motive where the
taxpayer carries on the activity in accordance with such practices.
Where a taxpayer has such preparation or procures such expert advice,
but does not carry on the activity in accordance with such practices,
a lack of intent to derive profit may be indicated unless it appears
that the taxpayer is attempting to develop new or superior techniques
which may result in profits from the activity.
(3) The time and effort expended by the taxpayer in carrying on the
activity. The fact that the taxpayer devotes much of his personal time
and effort to carrying on an activity, particularly if the activity
does not have substantial personal or recreational aspects, may
indicate an intention to derive a profit. A taxpayer's withdrawal from
another occupation to devote most of his energies to the activity may
also be evidence that the activity is engaged in for profit. The fact
that the taxpayer devotes a limited amount of time to an activity does
not necessarily indicate a lack of profit motive where the taxpayer
employs competent and qualified persons to carry on such activity.
(4) Expectation that assets used in activity may appreciate in value.
The term profit encompasses appreciation in the value of assets, such
as land, used in the activity. Thus, the taxpayer may intend to derive
a profit from the operation of the activity, and may also intend that,
even if no profit from current operations is derived, an overall
profit will result when appreciation in the value of land used in the
activity is realized since income from the activity together with the
appreciation of land will exceed expenses of operation. See, however,
paragraph (d) of §1.183?1 for definition of an activity in this
connection.
(5) The success of the taxpayer in carrying on other similar or
dissimilar activities. The fact that the taxpayer has engaged in
similar activities in the past and converted them from unprofitable to
profitable enterprises may indicate that he is engaged in the present
activity for profit, even though the activity is presently
unprofitable.
(6) The taxpayer's history of income or losses with respect to the
activity. A series of losses during the initial or start-up stage of
an activity may not necessarily be an indication that the activity is
not engaged in for profit. However, where losses continue to be
sustained beyond the period which customarily is necessary to bring
the operation to profitable status such continued losses, if not
explainable, as due to customary business risks or reverses, may be
indicative that the activity is not being engaged in for profit. If
losses are sustained because of unforeseen or fortuitous circumstances
which are beyond the control of the taxpayer, such as drought,
disease, fire, theft, weather damages, other involuntary conversions,
or depressed market conditions, such losses would not be an indication
that the activity is not engaged in for profit. A series of years in
which net income was realized would of course be strong evidence that
the activity is engaged in for profit.
(7) The amount of occasional profits, if any, which are earned. The
amount of profits in relation to the amount of losses incurred, and in
relation to the amount of the taxpayer's investment and the value of
the assets used in the activity, may provide useful criteria in
determining the taxpayer's intent. An occasional small profit from an
activity generating large losses, or from an activity in which the
taxpayer has made a large investment, would not generally be
determinative that the activity is engaged in for profit. However,
substantial profit, though only occasional, would generally be
indicative that an activity is engaged in for profit, where the
investment or losses are comparatively small. Moreover, an opportunity
to earn a substantial ultimate profit in a highly speculative venture
is ordinarily sufficient to indicate that the activity is engaged in
for profit even though losses or only occasional small profits are
actually generated.
(8) The financial status of the taxpayer. The fact that the taxpayer
does not have substantial income or capital from sources other than
the activity may indicate that an activity is engaged in for profit.
Substantial income from sources other than the activity (particularly
if the losses from the activity generate substantial tax benefits) may
indicate that the activity is not engaged in for profit especially if
there are personal or recreational elements involved.
(9) Elements of personal pleasure or recreation. The presence of
personal motives in carrying on of an activity may indicate that the
activity is not engaged in for profit, especially where there are
recreational or personal elements involved. On the other hand, a
profit motivation may be indicated where an activity lacks any appeal
other than profit. It is not, however, necessary that an activity be
engaged in with the exclusive intention of deriving a profit or with
the intention of maximizing profits. For example, the availability of
other investments which would yield a higher return, or which would be
more likely to be profitable, is not evidence that an activity is not
engaged in for profit. An activity will not be treated as not engaged
in for profit merely because the taxpayer has purposes or motivations
other than solely to make a profit. Also, the fact that the taxpayer
derives personal pleasure from engaging in the activity is not
sufficient to cause the activity to be classified as not engaged in
for profit if the activity is in fact engaged in for profit as
evidenced by other factors whether or not listed in this paragraph.
Best regards,
Bobbie7 |
