Treasury Regulation 1.183-2

Treasury Regulation 1.183-2 is a Treasury Regulation in the United States, outlining the taxes owed from income deriving from non-business, non-investment activity. Expenses relating to for profit activities, such as business and investment activities, are generally tax deductible under sections 162 and 212, respectively, of the Internal Revenue Code. However, expenses relating to not for profit activities, such as hobbies, are generally not tax deductible.

Treasury Regulation 1.183-2(a) defines activity not engaged in for profit as "any activity other than one with respect to which deductions are allowable for the taxable year under section 162 (business expenses) or under paragraph (1) or (2) of section 212 (investment expenses)." While this definition tells the reader nothing more than not for profit activity means non-business and non-investment activity, subsection (b) of Regulation 1.183-2 provides 9 factors which may be used to determine whether an activity is, or is not, for profit:

With regard to these 9 factors, section 1.183-2(b) stresses that "no one factor is determinative" as to whether or not an activity is engaged in for profit, and that a determination cannot be made simply because the factors indicating a for profit activity outnumber the factors indicating a not for profit activity, or vice versa. Section 1.183-2(b) also emphasizes that this list of 9 factors is not exhaustive, so that "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."

Hobby activities are activities undertaken not for profit motives but for personal pleasure. Under Internal Revenue Code Section 165, “losses of property not connected with a trade or business or a transaction entered into for profit” are not deductible except upon a casualty or theft. In addition, the general rule under Section 183(a) of the Internal Revenue Code does not allow a deduction for an activity that is not engaged in for profit. However, Section 183(b) allows two types of deductions attributable to a hobby: (1) deductions that would be allowable to the taxpayer in a taxable year whether or not such activity is engaged in for profit, and (2) deductions that would be allowable to the taxpayer if the activity were engaged in for profit, but only to the extent that the income from the activity exceeds the deductions allowable by the first type of deduction.

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