26 U.S.C. § 183 — Activities not engaged in for profit

submitted 57 years ago by Pub. L. 91-172 to r/title-26-INTERNAL-REVENUE-CODE · 612 words · no verdicts yet

in plain englishAI-generated · not legal advice

If a person or S corporation runs an activity not meant to make a profit — like a hobby — they generally can't deduct its expenses. But if the activity made more money than it cost in 3 of the last 5 years (2 of 7 for horse breeding), the law presumes it is a for-profit activity, letting the deductions through.

(a) General rule. If an individual or an S corporation runs an activity that is not engaged in for profit, no expense from that activity can be deducted under this chapter — except as this section allows. (b) Deductions allowable. For an activity not engaged in for profit, two kinds of deductions are allowed: (1) any deduction that would be allowed anyway, whether or not the activity is for profit; and (2) a deduction equal to expenses that would only be allowed if the activity were for profit — but only up to the amount the activity's income exceeds the deductions already allowed under (1). (c) Activity not engaged in for profit defined. An "activity not engaged in for profit" is any activity whose expenses are not deductible under section 162 (business expenses) or under section 212(1) or (2) (expenses for producing income) for that tax year. (d) Presumption. If an activity's income exceeded its expenses in at least 3 of the last 5 tax years, the law presumes — unless the Secretary proves otherwise — that the activity is engaged in for profit that year. For breeding, training, showing, or racing horses, this changes to 2 of the last 7 years. (e) Special rule. (1) In general. If the taxpayer chooses (elects), the IRS won't decide whether the (d) presumption applies until after the fourth tax year (sixth year for horse activities) following the year the taxpayer started the activity. (2) Initial period. If the taxpayer makes this election, the (d) presumption applies to each year in that 5-year (or 7-year) period, based on whether the activity's income exceeded its expenses in at least 3 (or 2, for horses) of those years. (3) Election. The Secretary sets the time, method, and conditions for making this election. (4) Time for assessing deficiency attributable to activity. If a taxpayer makes this election, the IRS gets extra time to assess a tax deficiency tied to the activity — its normal deadline doesn't expire until 2 years after the filing deadline for the last year covered by the election. This applies even if another law would normally block the assessment.

the actual law source: uscode.house.gov ↗public domain

(a) General rule

In the case of an activity engaged in by an individual or an S corporation, if such activity is not engaged in for profit, no deduction attributable to such activity shall be allowed under this chapter except as provided in this section.

(b) Deductions allowable

In the case of an activity not engaged in for profit to which subsection (a) applies, there shall be allowed—

(1)

the deductions which would be allowable under this chapter for the taxable year without regard to whether or not such activity is engaged in for profit, and

(2)

a deduction equal to the amount of the deductions which would be allowable under this chapter for the taxable year only if such activity were engaged in for profit, but only to the extent that the gross income derived from such activity for the taxable year exceeds the deductions allowable by reason of paragraph (1).

For purposes of this section, 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.

(d) Presumption

If the gross income derived from an activity for 3 or more of the taxable years in the period of 5 consecutive taxable years which ends with the taxable year exceeds the deductions attributable to such activity (determined without regard to whether or not such activity is engaged in for profit), then, unless the Secretary establishes to the contrary, such activity shall be presumed for purposes of this chapter for such taxable year to be an activity engaged in for profit. In the case of an activity which consists in major part of the breeding, training, showing, or racing of horses, the preceding sentence shall be applied by substituting “2” for “3” and “7” for “5”.

(e) Special rule

(1) In general

A determination as to whether the presumption provided by subsection (d) applies with respect to any activity shall, if the taxpayer so elects, not be made before the close of the fourth taxable year (sixth taxable year, in the case of an activity described in the last sentence of such subsection) following the taxable year in which the taxpayer first engages in the activity.

(2) Initial period

If the taxpayer makes an election under paragraph (1), the presumption provided by subsection (d) shall apply to each taxable year in the 5-taxable year (or 7-taxable year) period beginning with the taxable year in which the taxpayer first engages in the activity, if the gross income derived from the activity for 3 (or 2 if applicable) or more of the taxable years in such period exceeds the deductions attributable to the activity (determined without regard to whether or not the activity is engaged in for profit).

(3) Election

An election under paragraph (1) shall be made at such time and manner, and subject to such terms and conditions, as the Secretary may prescribe.

(4) Time for assessing deficiency attributable to activity

If a taxpayer makes an election under paragraph (1) with respect to an activity, the statutory period for the assessment of any deficiency attributable to such activity shall not expire before the expiration of 2 years after the date prescribed by law (determined without extensions) for filing the return of tax under chapter 1 for the last taxable year in the period of 5 taxable years (or 7 taxable years) to which the election relates. Such deficiency may be assessed notwithstanding the provisions of any law or rule of law which would otherwise prevent such an assessment.

Source credit: (Added Pub. L. 91–172, title II, § 213(a), Dec. 30, 1969, 83 Stat. 571; amended Pub. L. 92–178, title III, § 311(a), Dec. 10, 1971, 85 Stat. 525; Pub. L. 94–455, title II, § 214(a), title XIX, § 1906(b)(13)(A), Oct. 4, 1976, 90 Stat. 1549, 1834; Pub. L. 97–354, § 5(a)(23), Oct. 19, 1982, 96 Stat. 1694; Pub. L. 99–514, title I, § 143(a), Oct. 22, 1986, 100 Stat. 2120; Pub. L. 100–647, title I, § 1001(h)(3), Nov. 10, 1988, 102 Stat. 3352; Pub. L. 113–295, div. A, title II, § 221(a)(36), Dec. 19, 2014, 128 Stat. 4042.)

history & why it existsrecord from the source credit

1969Enacted · Pub. L. 91-172 · 83 Stat. 571
1971Amended · Pub. L. 92-178 · 85 Stat. 525
1976Amended · Pub. L. 94-455 · 90 Stat. 1549, 1834
1982Amended · Pub. L. 97-354 · 96 Stat. 1694
1986Amended · Pub. L. 99-514 · 100 Stat. 2120
1988Amended · Pub. L. 100-647 · 102 Stat. 3352
2014Amended · Pub. L. 113-295 · 128 Stat. 4042

A history note hasn’t been published yet. The record shows enactment by Pub. L. 91-172 on 1969-12-30.

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