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Business and Hobby Losses

Author: Brad Howland
First Posted: October, 2000

Losses occur when costs exceed income, and are usually a sign that things are not going very well. However, from a tax point of view, the nice thing is about losses is that you can write them off against other income you receive during the year.

Not only that, if the loss exceeds your combined income in the current year, you can carry it back up to three years, write it off against past income, and get a refund for tax paid at that time. If it still isn't used up, you can carry it forward up to 15 years.

If you are claiming losses on your self-employed music business, and writing them off against other sources of income, there is a chance that you will hear from the tax department. Don't let that stop you! If your expenses are legitimate, and you have the receipts to back them up, you shouldn't be afraid to claim them and create a loss. Take an aggressive, but well-documented, approach that stays within the tax laws.

However, you can't operate a business that continually loses money. This situation is called "hobby losses." If you have continual losses, the IRS decides that your music endeavors are a hobby, not a business, and you are not allowed to claim business expenses. You have to show a profit at least three out of every five consecutive years, or your losses will be disallowed.

The information on this website, and the use of this website, are both provided without warranty of any kind. Income tax rules change every year and some information may be out of date. All readers wishing to take advantage of the information offered here should consult a qualified income tax preparer. In no event will Brad Howland, Howland Tax Services, or this website be liable for any damages, including lost profits, arising out of the information offered on this website, or the usage of this website. All material on this website Copyright © 2001-2024 by Howland Tax Services, Inc. Please contact us for permission to use this material in any form. Website designed and maintained by Brad Howland.